The Four Ways a Financial Planner Can Be Compensated

Bankrate recently had an interesting piece detailing the four ways a financial planner can be compensated. The list:

1. Assets under management (AUM)
2. Hourly or set fee for work performed
3. Retainer model
4. Commission based model

As many of you are aware, I'm sure, they note that there's no one fee structure that works best for everyone.

A few thoughts from me:

1. The piece recommends reading The Future of Fees. I found it to be quite interesting. In particular, it lists comments from various planners at the end detailing what they charge.

2. For me, I think #2 or #3 would work best if I ever needed a planner.

3. Option #4 just seems crazy to me. Do you want to go to a planner or a salesperson?

What are your thoughts on this issue? Do you go to a planner? If so, what's he charge? If not, which of these payment options would work best for you if you were to go to a planner?

Comments

[Scott]

Big 10-4 on preferring options #2 & #3. I do not currently use a planner but have interviewed 2 in the last couple of years. The compensation model for both planners were option #4. I decided to continue to plan myself because of the cost and the fact that I feel confident in making a good plan.

[Travis Williams]

I have never used a planner but I think the best options would be #2 or #3 so that you have an idea of what the costs will be.

I like to use Microsoft Money to do my planning and find that is much easier now that I am out of debt (other than my mortgage).

I also think it is a good idea to talk to people that you know personally that have had experience handling finances for themselves and were successful at it. This can be very beneficial and free of charge.

[finance girl]

Using anyone but fee-only CFP just seems nutty to me.

[tinyhands]

One argument for a commission-based professional is when you need someone knowledgeable about SPECIFIC investments or insurance packages, as opposed to GENERAL knowledge about the investment/insurance categories. However, I don't think you'd want to do the majority of your PLANNING with this person. Plan by the hour or on retainer, then implement with a commission-based person.

(I've found that the hourly/retainer planners don't always do implementation of the plans, so this isn't necessarily screwing that person. It's kinda like shopping around at your brick & mortar stores, where you can touch and feel the product, then buying online where it's cheaper.)

[Duane Gran]

Option #1 has the benefit of aligning the fortunes of the planner with the investor who brings money to the table. Options #1 and #4 are fairly similar but typically in the first scenario you have a fiduciary relationship.