BY FPA member Amy Jo Lauber, CFP®
Last Updated: January 24, 2011
There are many ways a financial planner/adviser may charge for his/her services including commissions (from products purchased through the planner), fees (from managing assets or hourly and flat-fee services for financial planning) and some combination of both. The way a planner charges is only one part of his/her profile that you should consider. Below are some considerations for different revenue structures used by financial planners.
Commission amounts from products you may purchase (such as life insurance, mutual funds and annuities) can vary from product to product, but are typically built into the product itself (you don’t pay a separate amount for the planner’s commission). There has been much discussion about the ethics of planners working on a commission basis and the planner’s objectivity can come into question (i.e. is the planner only recommending products for which he/she receives commission?). But for some consumers, commission-based advice may be the most appropriate and affordable option. For example, if the planner you are working with is commission-based and you are only in need of some life insurance, you are able to purchase the products you need without any additional investment (such as a separate fee).
Fee-based advisers typically charge a percentage of assets under (their) management or AUM. The average percentage, according to a 2009 AdvisorBenchmarking™ Research Study, was .90 percent in 2008 (down from 1.11 percent in 2007). This fee is similar to the management expenses incurred in a mutual fund. Most fee-based advisers require a minimum account size, which may make them out of reach for some consumers (especially those who have the majority of their wealth in their 401(k) or other retirement plan).
Fee-based advisers may also charge for financial planning services on an hourly, flat-fee or retainer basis. The average hourly charge for a financial planner’s time ranged from $100 to more than $500, and flat-fee charges for comprehensive financial plans ranged from less than $1,000 to more than $5,000 (largely based on complexity and time involved), based on the 2006 Survey of Trends in the Financial Planning Industry1. Fee-based planners can also come under criticism as their clients may want (or need) to make withdrawals from their investment portfolios and may be discouraged from doing so if it could mean their adviser’s fee will be reduced (through reduced AUM).
Some financial planners charge both commissions and fees, depending on each particular client relationship. This revenue structure allows these planners to be responsive to each client’s unique needs and resources.
It is worth mentioning that those consumers who have a financial planner (specifically those who have a comprehensive financial planning relationship) feel they have more control over their finances, have increased peace of mind, know what they need to save towards retirement and save more than those consumers who do not have such a relationship2. It is clear that those who choose to work with a financial planner benefit financially and personally from such a relationship.
It is fairly easy to determine how a planner charges as well as the planner’s philosophy, specialization, and services by searching out the planner’s profile on PlannerSearch or viewing the planner’s website and appropriate disclosure forms (such as their ADV Part 2). It is crucial that you find a planner that specializes in those areas with which you need assistance, who possesses the appropriate licenses and designations, who has indicated their level of professionalism and experience, and who shares your values; not only what he/she charges. You may also be able to negotiate fees with some advisers, so don’t hesitate to ask.
1 2002-2006 College for Financial Planning
2 “Value of Financial Planning” Survey — The Financial Planning Association and Ameriprise 2008
FPA member Amy Jo Lauber, CFP®, is President of Lauber Financial Planning in Buffalo, NY.