Choosing a financial planner to work with is a very important decision. The industry has evolved and compensation models have evolved as well. Many people often aren’t sure how their planner is compensated. These are three different ways that a financial planner can be compensated:
Some planners are compensated by commissions on investment products and insurance products. Some of these planners will build a complimentary financial plan that will work toward your financial goals such as retirement or buying a home. This can lead to a conflict of interest when recommendations are made because different products typically pay different commissions. Asking your financial planner if they are compensated by commissions on products can be very important to understand the service you will receive.
Annual fees on assets under management
Some planners are compensated by a flat-percentage fee on assets that they manage. According to Investopedia, “the average fee for a financial advisor’s services is 1.02% of assets under management (AUM) annually for an account of $1 million”. Some advisors include their planning services in this fee, which is often called an “all-in fee”. This compensation model has become more common in the industry because your planner is able to rebalance your account periodically and change investments without triggering commissions. One potential conflict of interest with this pricing model is the planner would like to retain the assets under management and help you build a financial plan to pursue your goals. This can be a conflict when looking at other planning strategies such as paying more money towards debt instead of investing or buying real estate instead of putting additional money into your investment account. Asking your financial planner about what services are included with their flat percentage fee is very important to understand the service you will receive.
Flat dollar fees for service
Some planners are compensated by a flat dollar fee for planning. This has become more popular with independent financial planners because there are some DIY investors that want to work with a planner to build a plan, but they want to manage their own assets. This compensation model is very straightforward because you are paying a fee exclusively for a customized financial plan that you want. This model is especially helpful for young professionals and young families because they may have other issues such as paying down student loan debt or saving up to buy their first home before beginning to invest. Another benefit of this model is that some planners don’t have a minimum assets under management requirement to work with clients if they are compensated by a flat dollar fee to build out a financial plan.
In conclusion, choosing a financial planner is a very important decision. Understanding how they are compensated is an important part of that decision due to potential conflicts of interests. When choosing a financial planner you should note that some financial planners have a fiduciary duty to their clients, meaning they act in your best interest.
If you have any questions about choosing a financial planner or if you are interested in learning more about how we work with clients to build a financial plan, feel free to contact Ben at (307) 586-2702.