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Paying for a financial adviser

No part of the client-financial planner relationship is more important than understanding how you will pay for his services. Knowing how each compensation plan works will help you decide which fits your goals and needs. There are five primary ways in which advisers are compensated:

Commission-only. This type of billing plan has received a lot of criticism. The advisers collect commissions on financial products they sell. That creates a conflict of interest for those who sell investments, insurance policies or other products. The more things you buy, the more money they'll make.

On the other hand, commission-only planners argue you can walk away without paying if you do not accept their advice. Planners are required to disclose whether they have a financial stake in securities they recommend.

Fee-only. Fee-only planners are compensated solely through fees paid by their clients. Fees can be charged hourly, at a flat rate or a percentage of your assets or income. This method supposedly eliminates the conflict of interest associated with commission-based services.

However, Gary Schatsky, a New York City-based, fee-only adviser and vice chairman of the National Association of Personal Financial Advisers, a trade group for fee-only planners, acknowledges that this method may not be suited for certain individuals. "It might not be appropriate if you have an extraordinarily simple financial question or if you have just a few thousand dollars to invest," he explains.

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Fee-and-commission. This is the most popular compensation plan. These planners claim they are more objective than commission-only salespeople. Critics say that having to pay once for counsel and then again to act on it is too costly. But Deborah Voso, a CFP with Voso Associates in Frederick, Md., believes that this type of plan makes her services more affordable for clients with smaller accounts. She charges a flat fee for financial advice, but clients are not obligated to purchase any of the products she recommends.

Fee-based. This is similar to fee-and-commission financial planning. The only distinction is that planners let you choose whether you want to work on a fee-only or on a commission-only basis if you want to implement the plan through them.

Fee-offset. Under this unusual arrangement, planners charge a fee for developing an investment strategy, then reduce that fee if the client buys products from the planner. Commissions or asset management fees are deducted from the initial fee. While this option doesn't totally eliminate the conflict of interest dilemma, it prevents consumers from having to pay for both advice and products.

-- Posted: March 21, 1999

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Interviewing a financial adviser
Investigating a financial planner
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Financial advice glossary
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