Financial planners can be paid in a variety of ways, as listed below. Some are paid by more than one method.
Each method has its merits. Choosing the appropriate method depends on your individual situation. FPA believes that the planner's competence and ethical standards should be the primary consideration in your selection process. However, before entering a relationship with a planner, you should have a clear understanding of how he or she will be compensated because a particular compensation arrangement may suit your needs better than others.
Methods of compensation
There are several commonly accepted methods (source: Certified Financial Planner Board of Standards).
Commission denotes compensation generated from a transaction involving a product or service and received by an agent or broker, usually calculated as a percentage of sales or purchase transactions. This includes 12(b)1 fees, trailing commissions, surrender charges, and contingent deferred sales charges.
Fee-only means a CFP® professional may describe his or her practice as "fee-only" if, and only if, all the planner's compensation from all client work comes exclusively from clients in the form of fixed, flat, hourly, percentage, or performance-based fees.
Commission and fee applies if a CFP® professional and any related party receives or is entitled to receive both commissions and fees for providing professional activities; the CFP® professional must disclose compensation as "Commission and Fee."
In all the above categories of compensation, you should request information on any real or potential conflicts of interest. In addition to commissions received from any financial product sales, you should ask whether there are outside incentives or bonuses to be gained by the planner for certain recommendations.
Why full disclosure matters
At the heart of any working relationship with a financial planner is trust. Trust is built on two factors: the planner acting in your best interests, and full disclosure of the planner's background, business practices, and other issues.
Full disclosure means the planner is forthright in providing answers about their work experience, compensation, planning methods, and so on.
For example, what other business relationships does the planner have? These might be relationships with companies whose products the planner sells, or referral fees the planner earns by referring you to certain professionals. The financial planner should also disclose any disciplinary actions taken against them by various government regulatory agencies and professional associations. FPA recommends checking:
- Investment advisers: www.adviserinfo.sec.gov
- Objective business information: www.bbb.org
- Brokers: www.brokercheck.finra.org
- CFP® professionals: www.cfp.net
- Your state's insurance commission or department website for insurance agents
If you do not receive full disclosure from a financial planner, that is an indication you should take your financial planning needs elsewhere.