Financial Adviser Fees

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Paying for a financial adviser

The most decisive factors in the relationship between you and your financial planner are the fee involved and in what form it should be paid. Having prior knowledge how each compensation plan works will help you decide which fits your goals and needs better. There are five primary ways in which financial planners get paid:

Free financial planners (commission only)

This type of financial planner won’t charge a fee upfront. Free financial planners collect commissions on financial products they sell. This creates a conflict of interest between you and your financial planner. Financial planners who sell insurance policies, investments, or other products will make more money the more you buy. Free financial planners might be biased in their advice. They can drive you to invest on financial products that earn them a higher commission. Commission only billing plans have attracted a lot of criticism because of the latter.

However, you do not have to act on the advice from your free financial planner. You can choose only those products, that you think best match your need. The law requires that financial planners disclose whether they have a financial stake in securities they recommend.

Fee-only

Fee-only financial planners get paid solely through fees paid by their clients. The fees might be charged as an hourly rate, a flat rate or a percentage of your assets or income. Your financial planner should let you know how he or she charges the fee. This method supposedly eliminates the conflict of interest associated with commission-based services.

This method may not be suited for certain individuals. Fee only financial planners might not be appropriate if what you have is a simple financial question with just a few thousand dollars to invest.

Fee-and-commission

This is the most popular mode of payment. These financial planners can be more objective driven than commission-only planners. The critics of this method of payment say that having to pay once for counsel and then again to act on it is too costly. But then you can only pay for advice and not act as recommended by your financial planner.

Fee-based

This is very much alike to fee-and-commission financial planning. The only distinction is that the financial planner lets you choose between the two if you want to implement your financial plan through them.

Fee-offset

Under this arrangement, planners charge a fee for developing an investment strategy, and then reduce that fee if the client buys products from the planner. Commissions or asset management fees are deducted from the initial fee. This option does not totally eliminate the conflict of interest dilemma; it prevents consumers from having to pay for both advice and products.