When hiring a financial planner, it pays to screen carefully. It's important to understand exactly how each candidate is paid, so that you can make an informed market decision. But remember, few 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 up-front 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 it's 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 up-front 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 or she'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 a net worth less than $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 bottom line
Whether you have $1,000, $10,000 or $10 million to your name, you need to understand how the people who give you advice are paid. The answer really will determine the difference between good and bad counsel.

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