A few weeks ago I began my search for a financial planner (or financial advisor as some prefer) to review my monetary situation and see if I am on the right track for a sound retirement. I consider myself pretty savvy when it comes to personal finance, but I think it is always good to meet with an expert for a reality check. I mainly looked for financial planners through referrals, but also checked online financial planner search portals to get an idea of services and costs in my local area.
When it comes to costs, or the fees that financial planners charge clients, there are essentially four cost structures according to the financial planning association (FPA). Each payment option has its merits and depends on your individual situation. It is critical that you have a clear understanding of how your potential advisor or planner will be compensated, before entering into a financial planning relationship.
- Fee-only. This payment method covers financial planners who receive all their compensation exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees. Generally, planners who provide their services on a fee-only basis are considered to be the most unbiased as they get no benefit from recommending a specific product or company. However, because they are entirely reliant on client fees, they are also the most expensive.
- Commission-only. With this method there is no charge to the client for the planner’s advice or preparation of a financial plan. Compensation is received solely from the sale of financial products you agree to purchase in order to implement financial planning recommendations. This means that you will get recommended products from the company paying the financial planners fees and so inherently comes with some bias. Still for those who want a basic and standard low cost financial plan, this is not a bad option. Just make sure you go with a planner recommending or selling products from a reputable company. And always ask for full disclosure of where his/her fees are coming from.
- Combination Fee/Commission. A fee is charged for consultation, advice and financial plan preparation on an hourly, project or percentage basis. In addition, the planner may receive commissions from the sale of recommended products used to implement your plan. This has the benefits of both of the above options, but also the drawbacks. This option is suitable for those that already bank or have a relationship with a particular financial organization, but want a tailored plan. Smaller or solo financial planners tend to offer this fee structure.
- Salary. Some planners work on a salary and bonus basis for financial services firms. These planners tend to work for companies that provide financial planning services as part of an overall package or as a service to their corporate clients. Think of your Vanguard or Fidelity 401(k) plan provided by your employer. Chances are you can see a financial planner at one of these companies as a perk/benefit of your work plan. However, these planners are least likely to provide you with a personalized service and will only recommend products from their firm (i.e. employer).
In any of the above scenarios, you should request information on any real or potential conflicts of interest. Secondly, in addition to commissions received from any financial product sales, you should ask whether there are outside incentives or bonuses to be gained by the planner for certain recommendations.