Fee-based vs. Commission-based Financial Planners: The Pros and Cons

by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com

Throughout this article, I have referred to “financial planner” in the general sense to indicate advisors who work with life insurance, annuities, disability coverage and retirement planning. A “Certified Financial Planner” is a specific professional designation.

It’s common knowledge that you have to spend money to make money and having a professional financial planner in your court is a smart investment, but should you go with an advisor who charges you a flat fee or one who works on commission?

There are certainly pros and cons to each type and it may boil down to the financial planner you feel most comfortable with, regardless of how they make their living. When looking for any type of professional help, it’s always a good idea to seek out recommendations. Ask friends, family or co-workers what their experiences have been with financial planners and see if they think highly enough of theirs to give a good review. Reputation is everything in this field, so try to avoid inexperienced, poorly reviewed investment advisors.

Fee-based financial planners work by the hour, which may sound simple enough. They charge a set hourly fee or, in some cases, a flat fee for their services. The catch is, most fee-based planners also earn commission based on the financial products they sell. This can cause a conflict between your interests and theirs and your portfolio may end up suffering for it.

There are several different ways that fee-based planners charge:
- A percentage of assets under management
- Flat fees in the form of an annual retainer
- Hourly fees with a cap on the total amount
- Any combination of the above

It should be noted that “fee-based” is not the same thing as “fee-only.” Investment advisors who only charge a fee may be more impartial because they only work for the fees charged to clients, whether that is an hourly fee or an a la carte rate. Generally, fee-only financial planners focus on analyzing portfolios as a whole, so they have to be well versed in all areas. These include college financial aid, real estate, retirement and much more. With no commission to worry about, they might not pressure you into any products or investments. It’s in their best interest to grow your assets, since they may be paid more over time.

Commission-based financial planners are the opposite of fee-only advisors in that they earn money solely on the investments they sell. Most life insurance agents are paid commissions by the insurance company when they place a case. Remember, the insurance company pays the advisor the commission, not the client. When working with a commission-based advisor, you need to be sure that they respect your choices and share with you the available options. If it feels like the advisor is being overly forceful with a certain type of investment, especially one that you are not comfortable with, that’s a sure sign that they are thinking more of themselves than your portfolio.

New York requires life insurance agents to disclose when they are paid by commission. Commission rates on fixed annuities, term life insurance or whole life insurance are generally consistent across all insurance companies. It’s rare to have a company pay much higher than average commissions, unless it’s a product like a variable annuity, indexed annuity or life insurance contract.

Some investors may be best suited to having a good commission-based advisor:
- Investors with small portfolios that require much less management
- Clients who needs a basic review or analysis of their portfolio
- People looking for a specific product such as life insurance

Commission-based advisors may have access to better facilities and other financial professionals such as analysts and traders etc. They may also have the backing of a respected and renowned firm. Most fee-based advisors work independently, although they may have past experience as a commission-based advisor.

Regardless of how your advisor gets paid, remember that they are the financial professional and have the experience, education and drive to see your investments succeed, so take any advice to heart, even if you don’t act on it. If your commission-based advisor pressures you into active trading, because this is one way they receive bigger commissions, remind them that they are working for you, not the other way around. Always clarify how your advisor is being paid, if they don’t come right out and tell you at the outset.

No matter how you pay your financial planner, saving money and increasing your investments should be their top priority. The commission vs. fees debate is a hot topic in the world of financial planning, but it’s always best to work with someone you can personally trust, regardless of how they come by their paycheck.