If you’re looking for a financial planner, one of the first things you’ll want to know is how they are paid.
Financial incentives influence decision-making in even the most critical situations, and your financial planner is no different. How he gets paid can impact the recommendations he makes, and if those recommendations become the foundation of your financial plan you’ll want to be sure they’re being made with your interests in mind.
In this post we’ll look at the different ways financial planners get paid, and how working with a fee-only financial planner aligns your planner’s financial incentives with your financial interests.
How Does a Financial Planner Make Money?
There are three main ways:
Commission-based: These planners get paid when they sell a product, like a mutual fund or life insurance. They may offer advice for free, but they will make their money by selling the products they recommend.
Fee-only: These planners do not sell any products. Instead, they are paid directly by the client for the advice they give. There are a few different models here, with some planners working under a monthly retainer, some charging for investment management, and others offering hourly services.
Fee-based: These planners are a combination of the two. They both charge client fees and earn commissions for selling products. It should be noted that “fee-based” is not the same as “fee-only.”
How Fee-Only Benefits You
I’ll be upfront about this: I am a fee-only financial planner and I therefore have a bias toward the fee-only model. But I chose to go that route because I believe it’s the best way to align the planner’s interests with the client’s interests, and therefore to get the best possible outcome for all involved.
Here are three big reasons why:
1. Follow the Money
For a fee-only financial planner, the financial incentive is to satisfy the client. If the client is satisfied with the advice she is receiving, she will continue to pay for it.
For someone earning commissions, the financial incentive is to sell more expensive products. And since we know that low cost is the single best predictor of future investment returns, those expensive products may not be in your best interest.
2. The World Is Your Oyster
A fee-only financial planner is able to recommend any product or solution that helps you reach your goals. There are no limits.
A commissioned planner is, at the very least, limited to products that will earn him a commission. Many are further limited to the products their specific company sells.
Would you rather have your financial planner recommend the best solution for your situation, or the best solution that he is able to sell?
3. Who’s on Your Side?
Many fee-only financial planners chose that path for the same reason I did: They believe it’s the best way to align their own interests with their clients’ interests.
That certainly doesn’t guarantee that they’ll provide a quality service, but it’s nice to know their heart is in the right place.
How to Tell If Your Financial Planner Is Fee-Only
There are a few easy ways to tell:
You can start by looking at their website. Many will proudly state that they are fee-only on their home page or “about” page. A good example is Sophia Bera of Gen Y Planning, who explains that she is a “Fee-Only CFP®” in the sidebar that shows up on every page of her site.
Another option is to check their network membership. The XY Planning Network, NAPFA and the Garrett Planning Network are all financial planner organizations that require their members to be fee-only. If your planner is a member of one of those networks, he or she is definitely fee-only.
You can also use the CFP Board’s financial planner search tool, which lists each planner’s “compensation method” and will clearly say “fee-only” if they meet the definition.
Finally, you can always ask them directly if they are fee-only. If their answer is anything other than an immediate yes, you will know they’re not.
This Is About Your Life
In the end, this is about finding the best financial planner for your specific situation. You want someone who is in a position to make the best possible recommendations for the goals you’re looking to achieve.
No single revenue model can guarantee someone will be able to do that. Not all fee-only financial planners are good, and certainly not all commission-based or fee-based planners are bad. It is by no means that black and white.
But as an initial filter, going fee-only can increase your odds of finding a financial planner who will give you good, objective advice.
Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents build a better financial future for their families. His free book, “The New Family Financial Road Map,” guides parents through the most important financial decisions that come with starting a family.