April 15, 2022
When you pick a new financial planner, you want to be clear about how that person gets compensated, whether that works for your particular situation, and whether you feel you are getting good value. There are commission-based, fee-based, and fee-only planners. This article explores each one and the benefits and drawbacks for you, depending on your situation.
Become a Ruthless Interviewer and Take Your Time
The core of this article is about how financial planners are compensated, but compensation often gets intertwined with likability, skill, and availability. It’s easy to start second-guessing oneself as you start to interview potential planners.
Do your research, get lots of referrals. You also need to get clear about what you want out of the relationship and how you want it to feel. This is your money and your life. Make sure you’re getting the support you need.
Take your time with this decision. Good financial planners, on the whole, are gregarious, caring, social creatures. You’re going to like many of them as you do your interviews, and you might start getting frustrated and second-guessing yourself.
For example, you thought you wanted an hourly person and now you’re thinking having someone manage your money for a fee makes more sense. You might find that you like a planner whose compensation method is unattractive to you or dislike a planner whose compensation method you thought you wanted.
This is normal. Before you know it, you might be changing your thoughts on what kind of support you want, what kind of planner you want, and how you would like this person to be compensated. Take your time. Revisit your core desires around what you want from the relationship. Ask lots and lots of questions, unabashedly.
Commission-based? Fee-based? Or Fee-only?
There are three main types of compensation for financial planners: commission-based, fee-based, and fee-only. Let’s take a look at each one.
Commission-based Planners
Commission-based planners get paid a commission for every product they sell. This could be a mutual fund, life insurance policy, or anything else. They may also get a commission for referring you to another service, like a mortgage broker.
Benefits
- The planner has an incentive to sell you products that are right for you. If they don’t, you could fire them and they would lose their commission.
- This could be the most cost-effective way to get a planner paid for their services because money is not coming directly out of your pocket.
- Some products, like insurance-based ones, are only sold in this manner, although more options are becoming available.
Drawbacks
- The planner may be more interested in selling you products that generate higher commissions for them, rather than what’s best for you. If you have a simple financial situation or a small portfolio, you may not need expensive products or investment management services.
- Some planners may be more interested in selling you products than giving you unbiased advice.
- They may also be more likely to recommend products from companies they have a relationship with, rather than what’s best for you.
- These folks often do not have a fiduciary duty to you, which means they need only sell you what is “suitable,” not what is in your best interest. A rain jacket is suitable in the rain, but an umbrella might be a better choice. They don’t have to mention that.
- You will not always know what your planner will be paid unless you ask for full disclosure. While you might get the amount they are earning, you’re not going to know if they win a trip to Hawaii for selling 10 of those products this month.
Use these folks when….
- You’re young, starting or re-starting your wealth-building plan.
- You’re buying an insurance product (life, disability, long-term care) that you intend to keep for a long time.
- You want narrow advice, keeping in mind that “narrow” is subjective. Your situation or your question maybe not be as narrow or as simple as you think, given that one area of your financial planner usually impacts other areas.
Fee-Only Planners
Fee-only planners are paid solely by fees, either hourly, flat, project-based, or on a percentage of assets under management (e.g., 1% of assets up to $1M). They do not receive commissions on products.
Benefits
- The planner has no incentive to sell you products, making their advice feel more unbiased.
- There are no surprises when it comes to fees.
- You will know exactly what the scope of the project is and what advice you will get.
- Fee-only planners are usually held to a fiduciary standard, meaning they must always act in your best interest.
Drawbacks
- The biggest drawback is that there’s typically little follow-up support. An inordinate number of people get the flat-fee or hourly advice and never implement it. Or worse, they think they are implementing it but because they don’t have the ongoing support, they actually implement poorly or make mistakes.
- You may feel like you’re paying for things you don’t need if the hourly rate or percentage charged on assets is high.
- You may not get comprehensive financial planning if you’re only paying for hourly advice.
- Fee-only planners are not incentivized to keep up their education on commissionable products and therefore they may have fewer tools in their toolbox and a bias against using commissionable products. A commissionable product might be a perfect solution, and they may not know enough to recommend it.
- If they do believe a commissionable product makes sense (e.g., you need $1M in life insurance), they have to refer that business to someone else, which means you may have to explain your situation all over to the new person or make sure your multiple professionals talk to each other.
Use these folks when….
- You are a classic do-it-yourselfer, want to stay that way, can implement advice, and not need additional support for many years. You are getting a “second set of eyes” on your situation to confirm your own work and have someone point out issues you may not have considered. If you struggle to implement advice, hiring an hourly or project-based planner is probably a waste of your time and money.
- You are a classic do-it-yourselfer, have a seemingly isolated decision to make (e.g., do I rebuild this property or sell it as-is), can get that advice, and move on as a do-it-yourselfer.
- You want “unbiased” advice and comprehensive financial planning.
- You want to work with someone who is a fiduciary.
Fee-Based Planners
Fee-based planners are paid both by fees and commissions. Fee-based planners earn fees for the services they provide, such as asset management, financial planning, and tax preparation. They may charge an hourly rate, a flat fee, or a percentage of your assets under management (e.g., 1% on assets up to $1M). They may also get commissions on the sale of products.
Benefits
- You will have access to a wider array of services.
- You know exactly how much you are paying for their services. Most will disclose all fees or commissions earned and allow you to decide whether the value is there.
- The planner is not solely reliant on commissions, so they are more likely to give unbiased advice.
- They typically have a fiduciary duty to you, which means they have to do what is in your best interest.
- Fee-based planners typically have more experience than fee-only planners.
Drawbacks
- Fee-based planners may still have an incentive to sell you products, so you need to be sure that their fees are fair and transparent.
- The planner may have a conflict of interest if they are selling products that pay them a commission. For example, they may recommend you buy a mutual fund that has high fees because they will earn a higher commission.
- You may not get comprehensive financial planning if you’re only paying for asset management or hourly advice.
Use these folks when….
- Your situation is complex, and you need comprehensive estate, tax, investment, insurance, and legacy planning.
- You want “unbiased” advice and comprehensive financial planning.
- You want help with how your assets are invested.
- You want to work with someone who is a fiduciary.
- You want access to a wide array of services and expertise.
- You want ongoing support.
Remember that compensation is only one aspect of hiring a planner, and that there are professional, well-meaning people everywhere earning their money in a variety of ways. The trick to finding a planner is finding someone that you like, trust, and will provide solid value for the price you pay.
If you want to chat about fees, please reach out.
Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.