Having a Certified Financial Planner to guide you through the complicated realms of finance and investments is critical to your financial future. But do you know how your advisor is compensated? The two most popular methods of compensation are commission or fee based.
With commission there are two different types; front-end-load where the purchaser pays between 1-5% at the time of purchase and back-end-load where you pay a fee when you sell the fund. The percentage of this fee declines each year that you hold the fund usually after 7 years it reaches zero. The advisor will also receive on-going commissions to service the client.
Fee Only Advisors
When an advisor uses a fee-only structure, direct payment from clients is the only source of compensation. Charging a fee-based on an annual percentage of your assets that the advisor manages for you is one type of fee-only compensation. Generally the more services offered the higher the fee. If your advisor provides financial planning with managing your assets the fee will be higher. With these advisors you are paying for their advice and experience, many of these advisors have a minimum account size of between $100,000- $500,000.
Fee For Service Advisors
These advisors charge an hourly fee or a flat fee for the services that you engage them for. This form of compensation is similar to how you pay a lawyer or an accountant. this may be a good option if you are paying for advice only and the client is willing to implement the recommendations on their own.
Many advisors offer a combination of these compensation methods, based on the client’s needs, the complexity of the planning and the size of the account.
Some argue that fee advisors provide greater objectivity as their compensation precludes incentives for selling products. However, investors with smaller portfolios may not be able to afford a fee only advisor and as a result will compensate their advisor with commissions.
There has been a lot of debate in the media about which style of remuneration is better for clients. The overwhelming majority of financial advisers in Canada are still commission-based but our opinion is that fee based or fee–for–service financial planning is much better for clients as it lessens the risk of a conflict of interest.
Most clients require advice in areas such as budgeting, savings, insurance, and tax planning. Commission based advisors fail to provide these services due to the fact that they are not compensated unless they are placing the client into a product they sell.
In our opinion most people need financial planning advice on budgeting and saving and utilizing a fee based independent Certified Financial Planner is the best means to attain solid financial advice.