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Paying Your Financial Adviser

By: Source: AARP.org Date Posted: 2005-03-20 12:08:59

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Financial planners are not all alike. Even though they call themselves by the same name, they don't always provide the same services. They could also have very different approaches to their businesses. The best way to tell one planner from another is to take a good look at how they are paid.

What You Should Know

Before you hire a financial planner, make sure you get a written estimate of the costs involved. This estimate should list the services you will receive from the planner and the price you will be expected to pay. Insist that the planner give you his or her price in dollars and cents, not in percentages. Compare this estimate with estimates you receive from other planners. Select a package of services that is reasonable and meets your needs.

Generally, financial planners structure their fees in one of three ways:

1. Fee-Only Financial Planners charge you an hourly or flat fee. In return, the planner gathers your financial data, analyzes it, and recommends a plan of action. The planner also helps you carry out and monitor that plan. Fee-only financial planners might recommend that you make certain investments. However, they don't earn any extra money if you follow their advice. You must pay these planners even if you don't implement the plan they suggest. However, you can be sure that a fee-only planner won't try and sell you an investment just to earn a commission.
2. Commission-Only Financial Planners don't charge a fee for the services they provide. Instead, they earn their living from commissions. When you buy a product recommended by a commission-only planner, he or she receives a payment from the company that markets that product.
3. Fee and Commission Financial Planners get paid in two ways. They charge you a fee, like the fee-only planner. They also receive commissions, like the commission-only planner. If you hire this type of planner, you may pay lower fees, since these planners also receive commissions. Keep in mind, however, that the amount this type of planner earns, through fees and commissions, may be the same or more than what a fee-only or commission-only planner earns.

A Word About Fees, Commissions

Be Aware:

You have the right to receive a full accounting of how much your planner will earn. Insist that the planner tells you, in writing, what he or she will earn from fees, commissions, and other charges. Without this information, you won't be able to evaluate the cost of working with the planner.

Commissions can reduce the value of your investment. For example, if you put $10,000 into a mutual fund and your financial planner earns an up-front, 5-percent commission on the transaction, $500 would go to the planner and only $9,500 would be invested.

You should never be surprised by your planner's bill. Your planner should tell you in advance about any fee that will show up on an account statement or confirmation slip.

For More Information

Certified Financial Planner Board of Standards

The CFP Board publishes the brochure "Your Rights as a Financial Planning Client," which describes the kind of treatment you deserve from your financial planner.

URL: http://www.cfp.net