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Not all financial planners receive the same compensation. In fact, the two main compensation structures, pay-only and pay-based, may sound similar but they are different and indicate different terms of care under which the financial planner will work.
Pay-only financial planners play the same role as any other financial planner in your financial journey. Their job is to work closely with you to assess your financial situation and help you design a plan to reach your financial goals. They are paid for their work by collecting fees directly from their clients. These can be flat rates, rates that are a percentage of assets under management (AUM), or hourly rates.
There are benefits to working with a fee-only financial planner. The National Association of Personal Financial Advisors notes that this compensation structure is the most transparent and objective structure available. Being fee-only, these financial planners generally work under fiduciary duty, meaning they have your best interests in mind when suggesting products.
By not working on commission, fee-only financial planners are less likely to engage in conflicts of interest by promoting products that may not be the best fit for their financial needs, but will generate income for them.
Fee-Based vs. Fee-Only Financial Planners
Fee-based financial advisors are another type of financial professional available to help you create a holistic financial plan.
A fee-only financial advisor is not paid in the same way as a fee-only advisor. While a fee-based financial advisor also charges fees to their clients, they can also generate additional income through commissions on the financial products they recommend. They may also charge a performance-based fee. This is an agreed fee that you will pay when your portfolio performs well.
Some experts argue that due to their pay structure, fee-based financial planners can more easily enter into conflicts of interest. This can happen when a fee-based planner recommends a financial product, such as an insurance policy, for which you will receive a commission if you ultimately purchase it. By making money from these products, these planners may be promoting them for their own benefit.
On the other hand, the fact that a fee-based advisor earns a commission on certain products does not mean that he or she is not always acting in your best interest. Some of these advisers alternate between operating under a fiduciary duty and a fit and proper standard.
For example, if a financial advisor offers you a product that will not make you money but is still in your best financial interest, then they are acting under a fiduciary duty. The same advisor may also recommend a product that is right for you, but may not be in your best interest. If the financial advisor is willing to charge a commission for that product if you buy it, the eligibility standard would apply.
It’s important to understand the various standards of care your financial planner will work with and when. Have this conversation in advance with a potential financial planner so you have fewer surprises down the line.
What type of financial planner is best to work with?
Your specific needs generally determine which type of financial planner will be best for you, especially when it comes to affordability.
The full cost of fee-only financial advisors is usually easier to understand early in the process. Since they charge a flat rate, AUM rates, or an hourly rate, you’ll have a better understanding of what your total bill will be based on those factors.
Fee-based financial planners often have fees that are incurred throughout the different phases of the planning process. Keeping track of these costs and when they will be incurred can be difficult for some consumers to understand.
In addition to cost, you’ll want to make sure the financial planner you choose to work with follows a financial philosophy similar to yours. That means you’re on the same page about how you’ll measure success and your tolerance for market risk, among other things.
Do I need a financial planner?
Although it may seem that financial planners are professionals reserved only for the wealthy, that is far from the truth. Anyone with financial goals can benefit from working with one.
Finding a good financial advisor to work with in person requires research. Many professional financial planning associations offer free databases to ease the process of finding a financial advisor. These include:
If you are concerned about the cost of working with a financial planner, you may want to consider working with an automated advisor. These automated software platforms manage your investment portfolio based on your goals, and some also offer clients the opportunity to add personalized financial planning from a true financial professional for an additional cost. They’re also great tools to help you manage other aspects of your financial plan by offering more traditional banking services like cash management accounts and savings accounts.