Be sure that you understand the various ways in which a financial professional can be compensated.
How compensation is received may affect the advice you receive, if that planner faces hidden conflicts of interest.
The three most common models of compensation are:
Fee-Only Compensation – This model is the least common, but it minimizes conflicts of interest. It is the required form of compensation for members of NAPFA. A Fee-Only financial advisor charges the client directly for his or her advice and/or ongoing management. No other financial reward is provided by any institution—which means that the advisor does not receive commissions on the actions they take on the clients’ behalf. Compensation is based on an hourly rate, a percent of assets
managed, a flat fee, or a retainer.
Fee-Based Compensation (fee and commission) – This form is often confused with Fee-Only, but it’s not the same. Fee-based advisors charge clients a fee for the advice delivered, but they also sometimes receive payments for products they sell or recommend. In some cases, commissions are credited towards the fee, giving the appearance of a lower-priced option, but any outside compensation lessens the advisor’s ability to keep the client’s best interests first and foremost.
100% Commissions – An advisor who is compensated through commissions is primarily a product salesperson. A customer working with a commissioned sales person
must always ask himself: Is this advice truly in my best interest? Or is it the most profitable product for the advisor? Unfortunately, often the answer. In fact, commission sales people are required to put the best interests of the employer ahead of anything else.