Asking someone how they are compensated may seem like a taboo topic. But when you are considering hiring a financial planner, it’s very important to ask how they are paid and understand the answer. An advisor’s method of compsensation often affects their objectivity and the products they do or do not recommend. Here’s an overview of the major types of compensation in the financial services industry.
Fee-Only Financial Advisors
Fee-only financial advisors are compensated only by the fees paid directly to them by you, the client. There are different methods of calculating fee-only compensation. Some firms charge their fee as a percentage of assets under the firm’s management, others charge a flat fee, and still others charge an hourly fee based on the actual amount of the planner’s time used to deliver the requested services. Sycamore Financial Planning is a fee-only, hourly fee practice.
Advantages: Fee-only advisors receive no commissions or incentives based on product recommendations. This method of compensation ensures objectivity because the planner is able to focus solely on your best interests.
Potential Conflicts of Interest: As with any service, there is the potential for a fee-only advisor to charge the client for too many hours of work. However, Sycamore Financial Planning gives the client a quote for the requested services at the beginning of the engagement, which mitigates this potential conflict for the firm’s clients.
Commissioned Financial Advisors
Commissioned financial advisors are compensated primarily through commissions paid for products sold. They receive payment for their services based on which mutual funds, insurance, annuities, or other products they sell to their clients. Sycamore Financial Planning does not accept any commissions or sales fees for the products it recommends.
Advantages: This is the traditional brokerage model for securities and insurance products, and it has served many investors well by making financial advice affordable to a broad range of investors.
Potential Conflicts of Interest: Different commission amounts are paid on different products, and there can be incentives to recommend one product over another, regardless of whether it is the best product for the client’s needs. Because the advisor’s compensation is based on commissions paid, they often have sales targets they must meet each month which can influence the advice they provide. It can also be difficult to tell exactly how much you’re paying because the loads, fees, and commissions are often not broken out as a separate line item.
Fee-Based Financial Advisors
Fee based means the advisor charges a fee and accepts commissions.
Advantages: The advantages for both fee and commissioned financial advisors apply to fee-based financial advisors.
Potential Conflicts of Interest: The potential conflicts of interest for both fee and commissioned financial advisors apply to fee-based financial advisors.
Fee-Offset Advisors
Fee offset advisors charge a fee for their planning services but then will apply commissions received to offset the fee.
Advantages: The advantages for both fee and commissioned financial advisors apply to fee-based financial advisors.
Potential Conflicts of Interest: The potential conflicts of interest for both fee and commissioned financial advisors apply to fee-based financial advisors.
Salaried Financial Advisors
Salaried financial advisors are typically employees of a bank, financial firm, insurance firm, or discount broker. They are paid a flat annual compensation for their financial advice services.
Advantages: The advantages for both fee and commissioned financial advisors apply to salaried financial advisors.
Potential Conflicts of Interest: If a planner is salaried, they have a much lower potential for conflicts of interest. However, you should still be aware of the spectrum of products they are permitted to offer through their employer and understand that performance appraisals, bonuses, and continued employment are still a factor influencing the objectivity of their recommendations.