The Four Ways Financial Planners Get Paid
All Financial Advisors (or their firms) are compensated in one of four ways: commission-only, fee only, fee plus commission, and fee-offset. Let's look at each.
Commission-Only
Commission-only planners are different from stockbrokers and insurance agents (who also are commission-only) because of their breadth of knowledge as well as their methodology. Where brokers and insurance agents tend to talk about products, planners tend to talk about you.
Commission-only planners say they offer the best compensation method, because you pay only for implementation. If you do not buy the investments or insurance that the planner says you need, then the plan itself does you no good and is therefore not worth paying for. And since all investments and insurance products feature some form of transaction fees, expenses, sales charges, or commissions, you'll pay twice if you pay for advice, too. So commission-only planners say they are working in the consumer's best interests: If you don't like their recommendations, you spend no money on advice you're not using.
Critics, though, say this can create a conflict-of-interest. Since such planners make money only when you buy something, they have a strong incentive to get you to do so. Could that lead to bad advice?
Fee-Only
To avoid this conflict, some people turn to fee-only planners, who do not earn commissions. Instead, they charge fees, either hourly, usually $100 to $250 per hour, or a flat fee, often $1,500 to $10,000 or more. After you get their recommendations, you go elsewhere to implement. These planners do not earn commissions, so they say they do not have a conflict of interest.
But commission-only planners argue that fee-only planners don't earn commissions simply because they aren't allowed to -- because they do not have the required licensing, training, or experience to do so. Commission-only planners also say that fee-only planners are objective to the point of disinterest: since they are paid whether you implement or not, it makes no difference to them whether your investments succeed or fail. Commission-only planners also claim that just because fee-only planners earn only fees, that doesn't mean you pay only fees. You've still got to implement, they say, and that means you've still got to pay commissions or sales charges or transaction fees - to somebody. The fact that you're paying these expenses to someone else, rather than to your planner, is small consolation.
Countering this criticism, many fee-only planners show that they are involved in the selection and management of investments and insurance - and that they steer their clients to less expensive, commission-free products that can save their clients money. Such planners also argue that they do not hold certain securities or insurance licenses merely because those licenses are needed to earn commissions - and since they are not earning commissions, they don't need the licenses.
Commission-only planners retort that the "I don't need a license" posture is a smokescreen for advisors who don't have the knowledge it takes to earn a license.
As you can see, there's a strong turf war between these two groups.
Fees Plus Commissions
According to industry surveys, more than 70% of all financial planners charge fees plus commissions. In other words, most planners do hold insurance and securities licenses. Therefore, they charge fees to tell you what to do, and they also earn commissions by selling you the investments they say you need.
Many fee-plus-commission planners also charge asset management fees, usually ranging from 1% to 3% of the value of the assets they are monitoring for you. This can be in addition to fees and commissions. Also, some fee-only planners are charging asset management fees, either in addition to their hourly or flat rate, or in place of it. (Note: some fee-only planners feel that those who charge asset management fees are improperly calling themselves "fee only"; they believe that a true "fee-only" planner earns only hourly or flat fees.)
When Fees are Really Commissions
The asset management fee is emerging as the compensation method of choice for both planners and consumers. Consumers like it because they can avoid paying up-front commissions, and since the fee grows with the size of the assets, the planner's compensation is directly related to how well those assets perform. This puts the planner on the same team as the client: If the client's investments fall in value, so does the planner's fee -- while an increase in the client's account gives the planner increased compensation. This gives the planner a strong motivation to offer good recommendations. And planners like asset management fees because fees provide a steady stream of income from current clients. Commission-only and fee-only planners are continually looking for new business so they can earn a living.
But should asset-based fees be an additional form of compensation, or a substitute? Some planners say asset management fees can be so high that clients would have been better off paying commissions or flat rates.
Fee-Offset
These planners reduce their fees by whatever they earn from commissions. Thus, a fee-offset planner will be paid one way or the other, but not both.
Fee-offset planners say that by charging fees, they have the same objectivity of fee-only planners. But because they are fully licensed, they can implement their recommendations. All they are doing, they say, is reducing their compensation for the benefit of the consumer.
Fee-only planners, though, accuse fee-offset planners of being commission-based in disguise, while fee-and-commission planners claim the fee-offset group cannot afford to maintain such an aggressive fee schedule indefinitely. In other words, they say, fee-offset planners either must change to fee-plus-commission or they'll one day be out of business.
You'll have to decide for yourself which compensation method you prefer but rememebre to always shop about before you decide which Financial Advice to take.
|
