NOTot not all financial planners are paid the same. In fact, the two main compensation structures – fee-only and fee-based – may look similar but are different, and they indicate different terms of care under which the financial planner will work.
Paid financial planners play the same role as any other financial planner in your financial journey. Their job is to work closely with you to assess your financial situation and help you design a plan to achieve your financial goals. They are paid for their work by charging fees directly to their clients. These may be fixed fees, fees corresponding to a percentage of assets under management (AUM) or hourly fees.
There are benefits to working with a paid financial planner. The National Association of Personal Financial Advisors notes that this compensation structure is the most transparent and objective structure available. Offering only fees, these financial planners typically work under fiduciary duty, which means they have your best interests in mind when suggesting products.
By not working on commission, paid financial planners are less likely to engage in conflicts of interest by offering products that may not be the best fit for your financial needs, but will generate income for you. them.
Paid or pay-only financial planners
Paid financial advisors are another type of financial professional available to help you create a holistic financial plan.
A fee-based financial advisor is not compensated in the same way as a fee-only advisor. Although a paid financial advisor also charges fees to their clients, they can also generate additional income through commissions on the financial products they recommend. They may also charge a performance-based commission. These are agreed-upon fees that you will pay when your portfolio performs well.
Some experts argue that because of their payment structure, paid financial planners can more easily come into conflict of interest. This can happen when a paid planner recommends a financial product, like an insurance policy, for which they will receive a commission if you end up buying it. By making money from these products, these planners can push them for their own benefit.
On the other hand, just because a paid advisor earns a commission on certain products doesn’t mean they’re not always acting in your best interest. Some of these advisors alternate between a fiduciary duty and a suitability standard.
For example, if a financial advisor offers you a product that they won’t make money on but is still in your best financial interest, they are acting under a fiduciary duty. The same advisor can also recommend a product that is right for you but may not be in your best interest. If the financial adviser is supposed to earn a commission on this product if you buy it, the suitability standard will apply.
It is important to understand the various standards of care under which your financial planner will work and when. Have this conversation upfront with a potential financial planner so you have fewer surprises in the future.
Which type of financial planner is best to work with?
Your specific needs generally determine the type of financial planner that will be best for you, especially when it comes to affordability.
The total cost of paid financial advisors is usually easier to understand early in the process. Since they charge a flat fee, AUM fee, or hourly fee, you’ll have a better understanding of what your total bill will be based on these factors.
Paid financial planners often have fees that are incurred throughout the various phases of the planning process. Keeping track of these costs and when they will be incurred can be difficult for some consumers to understand.
Besides cost, you’ll want to make sure that the financial planner you choose to work with follows a financial philosophy similar to yours. That means you’re on the same page about how you’ll measure success and your tolerance for market risk, among other things.
Do I need a financial planner?
Although it may seem that financial planners are professionals for the wealthy, this is far from true. Anyone who has financial goals can benefit from working with one.
Finding a good financial advisor to work with in person requires research. Many professional financial planning associations offer free databases to help with the process of finding a financial advisor. These include:
If you’re concerned about the cost of working with a financial planner, you might want to consider working with a robo-advisor. These automated software platforms manage your investment portfolio for you based on your goals, and some also offer clients the option of adding personalized financial planning from a real financial professional for an additional fee. They’re also great tools to help you manage other aspects of your financial plan by offering more traditional banking services, like cash management accounts and savings accounts.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.