Certified Financial Planners Fee vs. Commission Services

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article contributed by

Brian Poncelet, CFP®

Insurance Advisor and Certified Financial Planner at IDC Worldsource Insurance Network

Extensive experience in Life & Critical Illness Insurance, Financial Planning and Planning for Small Business Owners.

When it comes to choosing your financial planning professional, which is better – fee-based or commission-based services? There are some fundamental differences, so let’s take a closer look at the pros and cons of each.

Different Payment Options

While there are two basic plans – fee and commission based – some professionals actually mix n’ match the two for a more customized approach.

  •  Flat Fee: As the name implies, you pay a certain sum upfront for a specified service or services. This is usually for a specific project, and not an ongoing, long term financial plan.
  •  Flat Fee Retainers: You pay a fixed sum every certain amount of months, and you get the services provided for that fee. This payment schedule may be useful for specific longer term projects or investments. As with the flat fee above, there will be no commissions taken out no matter how well (or poorly) the specified investment does.
  •  Pay As You Go Hourly Rate: If you are a total hands-on type of individual, a pay as you go plan may best suit you. You present your financial planner with your options and questions, you get their advice, then it’s up to you to implement those suggestions – and keep an eye on how well your money is faring.

Cautions for Fixed Rate Plans

With all three of the plans above, many times this particular problem crops up: the planner is not certified to sell insurance or securities. While they may suggest a certain course of action, you will have you go to yet another individual (whom the planner will most probably recommend) to actually purchase the financial instruments. This involves more time and effort on your part.

It would be like going to an auto consultant when your car’s engine light comes on. The consultant would diagnose the problem, but then send you down the road to someone else who could actually fix what’s wrong!

Another pitfall is that if the planner isn’t making money off a particular investment, they might not bother to be knowledgeable about it. The various life insurance policies are a prime example. Many straight-fee planners simply gloss over life insurance concerns, giving them short shrift in the process.This is decidedly NOT helpful to you, your family or your wealth.

Fee Only vs. Fee Based

To add even more confusion to the mix, you should know the difference between “fee-only” and “fee-based” compensation. A fee-only advisor is prohibited from receiving commissions form any brokerage, mutual fund or insurance company. They can only get their payment directly from you – either from a check upfront, or a percentage of your account holdings, or both.

Fee-based advisors don’t have this limitation. They can get paid by commissions from the financial institutions whose instruments they recommend and sell, as well as directly from you – either straight payment or percentage based.

Pure Commissions

With a straight commission based option, you pay nothing upfront or out of pocket. The financial planner derives his income from the commissions on the financial instruments he suggests and you purchase.

The good thing here is that you don’t have to initially shell out any money. The problem can be that the advice being offered is tainted by the type of financial instruments the planner has in his arsenal. You may be steered in only those directions which will benefit the planner as well – possibly forsaking other, more lucrative alternatives.

The planner should also have no hesitation about revealing the commissions he’ll derive from the instruments he’s suggesting. If you’re told that’s “proprietary information,” take your account elsewhere.

Percentage Based

This is the most common method of compensation for services. The financial planner gets paid a commission on the activity of your accounts. The more money the planner makes for you, the higher his paycheck will be. This provides an excellent incentive for the planner to do his or her best!

You must ascertain however if the percentage based option is fee-only or fee-based as discussed above.

What You’ll Want From Your Financial Planner

Here are the options you’ll want to have when choosing the Certified Financial Planner right for you:

  • One Stop Shop Services: Will the advisor you visit not only offer unbiased advice, but can recommend, complete and sell if necessary the financial instruments you’ll be needing? If not, do you really want to go on an extended goose chase locating all the various other financial professionals to complete your financial mission?  In effect, paying  multiple times and multiple advisors for the same service?
  • Broad Based Knowledge: You’ll need a Certified Financial Planner who can look at your total financial picture, and make suggestions that will benefit you and your particular assets; some one who can coordinate the entire financial plan:

 A great planner knows the ins and outs of how banks, regulations, taxes and the economy work in the real world – and will put that knowledge to work for you.

Looking Forward

As your financial life proceeds, your assets will change. You’ll want a planner who will anticipate your needs, and make recommendations based on your potential net worth as well as your current assets.

You’ll also want a planner who can see beyond the current political-socio-economic picture, and sniff out potential pitfalls – before they happen: the financial & banking fiasco in Cyprus is a prime example!

Attention to Detail

When you hire a Certified Financial Planner to manage your finances, choose one that will stay on top of your investments and financial position. At the very least, demand quarterly statements, 6 month reviews and a full-fledged yearly re-evaluation of your entire financial portfolio.

In essence, you’ll be leaving the essential financial grunt work to someone who knows how to do it best – without making any mistakes along the way.

Working Towards A Goal

This is something many people fail to consider – the money and wealth you’re working so hard to accumulate has to be towards an eventual goal! If that goal is stuffing your coffin pillow with bullion and bank notes, your entire time on this earth will have been wasted.

Discuss your plans, your ambitions and your dreams with your planner, then the both of you can set out to make those dreams a concrete reality. If you and your family can’t eventually enjoy this wealth, why have it?

Chemistry

This one is often overlooked. You and your Certified Financial Planner will be working closely together. He or she will have intimate details about your entire financial life – more so than your lawyer, banker, accountant or even the taxing authorities. With this type of professional relationship, it’s best to have someone you actually like and trust, not just grudgingly tolerate.

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If you live or work in the Oakville/Toronto area please call me for my free book on investing during times of crisis: “Wealth in Motion.” In it, you’ll uncover:

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Author: Brian Poncelet, CFP®