Financial planning is a highly personalized and complex service, so it's a given that all professionals charge a fee for the service they provide. However, how these fees are assessed is where the distinction rests among this group of professionals. Commonly, financial planners charge a variable rate, such as one based on commission. However, a smaller number of professionals offer fee-based financial planning services. Learn more about this less-common approach to determine if it best suits your needs.
No Accountability or Commitments
One of the more recognizable differences with fee-only planners is that they typically work independently. Many commission-based planners work for larger financial institutions or organizations. As a result of this connection, they sometimes have a duty to promote certain products and plans.
In some instances, these offerings are beneficial for the customer, but it's not always the case. Since fee-only planners typically operate independently, they are not required to offer these additional offerings, which can often save the customer money.
Straight Forward Needs
In terms of the benefit of a fee-based financial planner, these professionals are excellent for customers who have a very specific or straightforward need. For example, assume the person already has a solid plan for retirement but is instead looking for investment opportunities to fund a hobby.
With this type of need, the amount of preparation and time that must go into developing the plan is generally less involved than someone who is in need of a retirement plan. The ability to pay only for a specific straightforward need often offers a great deal of saving.
No Bearings on Earnings
Another benefit of fee-only financial planners is that their fees are not based on your earnings. With traditional fee structure planners, how much you pay the planner is largely based on what you earn. For this reason, someone with an annual return of $50,000 will pay considerably more than someone who only earned $5,000.
Fee-only planners charge a rate that is based on the service they provide; not how much you earn from the investment. As a result, it doesn't matter how much you earn; you can expect to consistently pay the financial planner the same amount for their services.
Every person has a different need when it comes to their financial planning approach, so naturally, the ideal pricing model will also not be the same from person to person. Keep each of these points in mind as you decide what option is best for you.