Making Better Financial Decisions

Fee-Based, Commission, Or Fee-Only — Which Financial Planner Should You Use?

by Glen Hawkins

Do you want to work with a financial planner? Many Americans underestimate the value of using a trained professional to help manage their investments — even modest ones — to make the most of their money and the time they have to plan. Part of the reason that financial planners are underutilized is the perception that this will cost significant amounts of money. 

The reality, though, is that there are a variety of ways to make financial planning services more affordable. To begin with, today's investors can choose a planner who is paid in a manner that most fits the client's situation. What are these payment methods? Here are the three basic categories and how they can help you keep things within budget.

Fee-Only Planning

One popular category of financial planners are those paid solely on a set fee. This is usually an hourly rate stipulated and agreed to upfront. Alternatively, the fee may be based on a monthly amount or a percentage of the portfolio they manage.

But these planners don't accept commission-based models, meaning that you know what you will owe right from the start and generally have a more stable fee. It also helps assure you that your planner isn't being paid to promote any products they don't believe in. 

Commission Planning

The most common way to pay a financial planner is on a commission basis for products that they sell to you. This commission may be paid from your portfolio, from the product's owners, or a combination of both.

Commission-based planned can be attractive if you don't have the funds to pay a regular fee upfront. It also allows the products to pay for themselves at least some of the time. But many clients feel that it incentivizes the planner to choose high-commission products regardless of their benefit to you.

Fee-Based Planning

A hybrid of these two extremes is a fee-based planner. This professional works on a foundation of a fee structure — a flat rate, an hourly rate, or a percentage of the portfolio — thus boosting their reliability as a fiduciary. But they can advise you about products that have a commission included if they feel that these products would be in your best interests.

This relaxed structure allows the planner to choose what they feel works best for your goals and risk tolerance. 

Which type of payment method is right for you? The answer depends on your goals, your concerns, and your budget. But no matter which means you choose, working with a financial planner will surely lead to bigger returns and a more stable financial future.