How are Financial Advisors Compensated
The way in which your financial planner is compensated can make all the difference in the recommendations they make for you.
That’s because some planners work under a standard that requires only that their recommendations be suitable to your particular situation. Other planners work under a fiduciary standard that requires planners to consider what is in their client’s best interest.
You may be wondering why your planner would make a recommendation that is not in your best interest. That’s where the issue of compensation comes into play.
There are three basic ways in which financial planners are compensated:
commission & fee model
Fee Only model
Both commissioned and commission + fee planners receive a compensation based on the specific financial products they sell to you. Because of the conflict of interest inherent in these transactions, these planners may have difficulty putting the client’s interest above their own.
My position is that the Fee Only method of compensation is the most transparent and objective method available. This model minimizes conflicts and ensures that I act as my client's fiduciary. Fee Only planners are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets.
Fee Only financial planners may be paid hourly, as a retainer, as a percentage of assets (AUM), or as a flat fee, depending upon the planner you choose.