Generally speaking, there is a lot of money in financial planning services: money exchanged, money invested, and money earned — often occurring in a span of no more than a few minutes. When a person retains the services of a financial planner, some of that money necessarily goes to the planner. Most financial planners around the world operate on a fee-based payment scheme. Fee-based financial planning services make the planners money from a host of fees assessed on transactions. Some of these fees are paid by the investor, but others are often paid in the form of commissions from bond or stock brokers.
In a fee-based financial planning scenario, a financial consultant is usually making money from several sources. First, of course, is the client, the subject of the financial plan. The client is typically assessed a fee for services in one of three ways.
A flat fee means that the client pays a certain amount up front for services, often calculated as a percentage of the total amount to be invested. A percentage-based fee means that the financial adviser will receive a set percentage of the invested portfolio’s worth, usually at year-end. If the investment has grown, the planner is paid more; conversely, if it has shrunk, the planner is paid less. Finally, clients can retain the services of many financial planners on an hourly basis, which often means that the fee they are charged is the planner’s hourly rate for advising services.
Depending on the planner, fees can also be assessed per transaction. Buying new stocks, trading shares, or moving money between accounts could be subject to a service fee, depending on the planner. While transaction fees are typically small, they can add up quickly if numerous transactions are made at a time, or if a client frequently shifts investments.
Fee-based financial planning generally permits financial planners to collect commission-like fees from fund operators, as well. Whether a financial consultant should be ethically allowed to receive a kickback from a fund he or she recommends to a client is highly controversial. Many consumer advocates argue that commission-based payments encourage planners to put their energy into selling the most lucrative funds, rather than creating a financial plan tailored to the client’s personal financial goals. Advice should be given based on the client’s individual situation, critics argue, not based on which choices will make the planner more money.
To avoid controversy, most fee-based financial planning services disclose the sources of all fees and payments in writing. Advisers should also answer fee-related questions honestly, if asked. In many ways, the term “fee-based” indicates that financial planning services could be at least influenced by outside commissions. Financial planning that is purely paid by the client is known as fee-only financial planning.
Although they sound similar, fee-based financial planning is not the same as fee-only financial planning. Personal financial planning that is designated fee-only means that the only way the planner is making money is through the client. Fee-only planners are not allowed to receive payments or take any incentives from fund operators or bond vendors.
Fee-only financial planners are in the minority in the financial planning world. Nevertheless, they remain some of the most vocal proponents of financial planning ethics codes and mandatory fee disclosures. In the United States, an elective membership organization known as the National Association of Personal Financial Advisors, or NAPFA, provides a registry of all confirmed fee-only planners, and offers an extensive referral service. The association also engages in lobbying activities to change and amend existing laws and regulation to eliminate even perceived conflict of interest in the financial planning industry, and to require financial planners to be completely upfront about their billing and payment sources.