Fee-Based Or Commission-Based: Choosing A Financial Planner 101

Many people find the task of choosing a financial planner somewhat daunting. However, it is one of the most important decisions a person can make. What do you need to know about choosing the right financial advisor for your needs?

The ideal financial planner is a trained, experienced professional who inspires trust and demonstrates the highest level of competence and integrity. His or her role in a family’s finances is as crucial as that of a family attorney.

Like attorneys or other professionals, some financial planners specialize in certain areas—insurance for instance. The upside of this approach is that the advisor is highly knowledgeable about that particular product. The challenge is that a specialist may have a rather limited focus. For example, a financial planner at an insurance company may focus on offering insurance products as a solution to your financial needs. A mutual fund firm may suggest you put your money and trust in mutual funds.

While one of these solutions may, in fact, be right for a particular investor or family, each may be only part of the picture that you should examine before deciding on the best financial plan for your future. A financial services provider who offers a range of options is more likely to meet all your needs over your lifetime, to understand your risk tolerance and goals, and act as a trusted advisor.

In addition to differing in terms of the range of solutions they can provide, advisors also differ in how they are compensated. The ideal financial planner is the professional whose personal financial incentives best match those of his or her customers. In other words, you want an advisor who gets paid for doing a good job for you, not for selling particular products.

Financial planners are paid commissions, fees or a blend of both.

There are three types of commission payments:

• one-time sales rewards, such as mutual fund “loads” or the up-front payments that come from selling annuities and cash-value life insurance policies;
• ongoing, annual service payments, such as those made to insurance agents upon policy renewal; and
• those paid for such transactions as buying and selling shares of stock.

Other planners are paid fees based either on a percentage of a family’s total assets or on only those funds the planner manages. This is the most common form of payment for independent financial planners.

Some planners are paid fees based on an hourly rate, like those paid to a lawyer. Others receive an up-front payment for developing a financial plan, including an inventory of assets and a plan of action.

Planners who are paid on a fee basis are better positioned to advise customers about investment options from an objective and neutral viewpoint than those who are inclined to recommend those investments that offer them the highest commission.

Fortunately, investors can resolve any confusion they may be experiencing about all this now that structural changes in the financial services industry have allowed full-service banks to become convenient, comprehensive conduits for investment
services.

A financial planner can focus on an individual client’s needs rather than be motivated to sell a particular commision-rich product. This neutral approach begins with the BluePrint financial plan, a comprehensive product-neutral procedure that moves from an objective analysis of an investor’s current situation and long-term goals to a practical strategy to meet those goals.

This approach has generated such remarkable loyalty and trust that families often maintain client relationships over several generations and the span of decades.

The changes in federal regulations that made it possible for full-service banks to provide customers with a more complete array of services and advice have significant implications for consumers. When planning for your financial future, seek out a financial services provider that can help you create a broad investment framework that takes into account fee-based investment services, banking, trust and insurance. The result will be a comprehensive, neutral, customer-oriented approach that puts you in control of the “big picture.”

This article is reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.