When it comes to hiring a financial planner, it pays to screen carefully. It's important to understand exactly how planner candidates are paid so that you can make an informed market decision. But remember -- not many worthwhile pros work for peanuts. (Don't get so ruthless about cost that you end up with worthless advice.)
There are essentially three types of commission payments:
- One-time sales rewards, such as mutual fund "loads," or the upfront payments that come from selling annuities and cash-value life insurance policies
- Ongoing, annual service payments, such as annual commissions paid to insurance agents upon policy renewal
- Commissions paid for transactions, such as buying and selling shares of stock
Fee based on percentage of assets
Some planners charge a straight percentage of your total assets on an annual basis -- either all assets (from your personal balance sheet) or just the assets they are helping you manage. This is the most common arrangement for paying an independent financial planner and is increasing in popularity.
Fee based on an hourly rate
Under this arrangement, you do the bulk of the work and pay the planner for information and advice on an as-needed basis -- like the typical arrangement with a personal lawyer.
Flat fee for a one-time financial plan
You pay a hefty upfront fee -- often in the many thousands of dollars -- for a glossy write-up of your total financial empire, complete with recommendations for action.
How compensation can taint the advice you get
You'll find that most planners mix and match these income options, which - surprise! - makes it difficult to do a side-by-side comparison of financial pros. Don't be misled by simple labels. Ask planner candidates exactly how they will be paid. "Fee-only" should mean that the planner accepts no sales or trading commissions. Ask directly to be sure.
"Fee-based" and "fee-offset" are not the same as "fee-only." The fundamental basis of these relationships is a fee, but subsequent commissions are also part of the package -- either charged on top of fees ("fee-based") or subtracted from fees ("fee-offset").
In the best case, even a well-intentioned commission-based planner might overlook the best option for you if he's not trained and paid for selling it. In the absolute worst case, commission-only planners are thinly disguised salesmen with no interest at all in your finances -- beyond selling you the one product for which they are most highly compensated.
Unless you know exactly what you're after, stay away from the "complete financial plan for a few thousand dollars" option. The resulting plans are often long on glossy charts but short on specific advice to solve your unique problems. Moreover, there may be no ongoing advice to service your constantly evolving needs.
The more money you have, the easier it will be to find a fee-based financial planner, particularly one that charges a "percent of assets" fee. Having a lot of money doesn't necessarily mean that your finances are more complex, but it does make it more likely that a planner can save (or make) you enough to more than offset the ongoing fee.
Folks with net worth below $100,000 will have a much tougher time finding a fee-based planner. Moreover, if they are just looking for occasional advice, an annual, asset-based fee is usually an expensive proposition relative to the payback. An hourly charge usually makes more sense. If this is you, expect to take a little more time and effort to find a good planner. It's unlikely that one will knock on your door.
The Fool Way
Given the complexities of the compensation system and the inherent conflicts of interest, The Motley Fool created an alternative financial planning resource that removes those complications.
For a $195 flat fee, TMF Money Advisor subscribers get unbiased planning and advice that's affordable and free from the conflicts that traditional planners face. It includes a comprehensive, hand's-on online financial planning tool; one-on-one phone advice from a financial professional (who with your permission can access the financial information you provide in the online planning tool; unlimited Fool education via our online seminars and active discussion boards. (The details of these services are discussed in "Whom To Hire.")
So how do we make money from you? The Motley Fool gets paid only for the service we provide. Neither Ayco advisors (the folks who answer your questions via phone) nor DirectAdvice (the company that administers the online planning tool) receive any commissions from the recommendations they make.
Whether you have $10,000 to your name, or $10 million (and are considering bequeathing a handsome sum to The Motley Fool Inc.), you get the same level of service -- the same tools; the same attention from The Ayco advisors. Best of all, you can tinker with your plan any time you'd like -during your lunch break or when you experience a major life change. (Yes, even saving for your son's second round of orthodontia has financial implications.) When you work with a traditional financial planner, you pay each time you want to make modifications to your plan.
Of course we're biased about this service -- it's ours, after all. However, if you decide to use TMF Money Advisor and are unconvinced about its virtues, we offer pro-rated, money-back guarantee, so you can test-drive it without parting with a lot of cash.
Again, it comes down to finding the way you are most comfortable with working with a pro. But do not overlook the importance of compensation. It plays a large roll in the quality of the advice you get.