By Jon L. Ten Haagen, CFP ®
Last article we spoke about the various ways financial planners get compensated. This week, we will explore the ways you might make your choice of what fee structure fits your needs.
Which is better for the consumer? Commissions or fees? The quality of a financial planner’s work is independent of the method of compensation used. Basically, competence and compensation are independent of each other.
No matter the method of compensation, there is always the possibility of conflict of interest. For instance, a fee-only planner who bills by the hour could take advantage of the situation by spending more time with you than is absolutely necessary. Likewise, a planner who is compensated though commissions could be recommending certain products that offer higher payouts/commissions to the planner.
It’s essential that you have a strong sense of trust in the planner you choose. To establish that trust, you must check out the planner thoroughly. Find out the planner’s background and credentials, get references, and call them, knowing that the planner will likely give you references of clients who will sing praises.
Review a sample plan. You can go to the FPANET.org to research CFPs and what they can do for you. You can also go to FINRA.org and research financial planners and find if they have any negative reports about them. Do your homework. You work very hard for the money you are saving and putting to work for your future, so check all the sources you can.
If a planner is honest and straightforward about compensation, then you should have the information you need to evaluate the advice you receive. Don’t hire a financial planner who won’t disclose how they are compensated. Then, based on the info you gather, you should rely on your gut feeling about a planner. If you don’t feel completely comfortable telling your financial advisor everything about your finances, you can’t take full advantage of financial planning.
Isn’t a fee-only in the position to offer the best, most objective advice? The best advice is advice that takes into account all your needs, goals, resources and desires. Good planners must be knowledgeable, ethical and trustworthy. No matter how you pay a planner, the quality of the work the planner does depends on other factors. Understanding and concern for your best financial interests is important criterion of quality financial advice.
Don’t financial planners who receive commissions have a serious conflict of interest? It’s a question of integrity. Financial Planning Association research shows that a consumers’ rate of ‘trust’ and ‘ethics’ are the most important elements in their relationships with financial planners. Survey respondents gave this response twice as often as they mentioned good advice and expertise.
If your first choice is a financial planner who happens to work on a fee-plus-commission basis, and you’re concerned about the possible conflicts of interest, you have the option to implement the plan yourself or through someone else. Simply let the planner know you don’t intend to purchase products directly, but would like the planner to prepare a financial plan on a fee basis.
I only have a modest income. Which type of planner is best for me? Generally, fee-and- commission or commission only planners work with people of modest means. Typically, the fees you would be pay working with a fee-only planner would make financial planning prohibitive. There are exceptions to the ‘rule,’ so be sure to interview a number of planners and ask them about concerns.
What does a typical financial plan cost? Plans range from about $250 for a basic plan to over $4,000 for a complex one. Fees vary widely depending on the complexity of your financial situation, the area of the country in which you live and the financial planner or firm with whom you work. If you are single with no dependents, a limited estate and straightforward goals, you will likely pay a lower fee for a plan than someone with a more complex financial situation.
What do you need to know about a financial planner? They come in all flavors to choose from so choose wisely. Compensation is just one among many important elements that should figure into your decision about hiring a financial planner. Financial planner is a generic term, so look into education, credentials, references, trust and rapport, along with compensation methods and their links to other financial experts (CPAs, estate Planning Attorneys, insurance experts), and others who can help make the best plans for your specific needs. No financial planner I know is capable of doing a complete complex financial plan without the expertise of other professional, so be sure they have qualified professional who complement their skills and expertise.
All four compensation methods have their advantages. You must choose the method which, combined with the other qualities of the practitioner you select, best fits your needs. If you do not understand how your financial planner is compensated, it is your responsibility and your right to ask. Question your planner in as much detail as necessary until you are clear. As a smart consumer, you want to know what you are buying and how much you are paying for it. You are entitled to that info.
Call the FPAnet.org to find competent and up to date certified financial planners in your area to interview. You can also get literature that may explain other areas of interest to you within the financial planning arena.
Thank you for taking the time to read this article. We hope you found it of interest, and, as always, we are here to answer any questions that might come up.
Huntington’s Jon L. Ten Haagen, CFP, runs Ten Haagen Financial Services, Inc., a full-service independent financial planning firm, and he is here to answer your questions. In this bi-monthly column, Ten Haagen will answer your financial questions and help you with his expert financial advice. Don’t be shy, our expert is here for you, so feel free to ask away! Email your questions to email@example.com today, and let our expert help you.
*Ten Haagen is an Investment Advisor Representative offering securities and advisory services offered through Royal Alliance Associates, Inc., member of FINRA/SIPC, and a registered investment advisor. He is also an active community member, serving on several nonprofit boards and as executive officer of the Greater Huntington Boating Council.
**BACK IN HUNTINGTON: The offices of Ten Haagen Financial Services, Inc. have moved back to 191 New York Ave., Huntington. Friends and clients are welcome to stop by, check out the new office and share a cup of coffee with the expert!