Understanding how financial planners are compensated is essential for high-income earners and high-net-worth individuals accumulating significant wealth and income. This knowledge can empower you to make informed decisions about who manages your wealth while ensuring that the advice you receive is in your best interests and free from potential conflicts of interest.
Misunderstanding or overlooking how your financial professional is compensated can generate hidden costs, potentially reducing your net returns (gross returns minus expenses equal net returns). Hidden fees, in particular, can have a substantial impact; while they may seem negligible, over time, their compound effect can become substantial, silently reducing your portfolio’s future value.
Integra Insights: We know every dollar of expense is one less dollar you will have for your future use.
Understanding how Paramus, NJ., CERTIFIED FINANCIAL PLANNERS™ (CFPs®) are compensated is pivotal to protecting and nurturing your financial well-being.
This article will explore financial planner compensation models in more detail. Let’s get started.
The Fee-Only Model:
Fee-only financial advisors typically charge a recurring quarterly fee based on the percentage of the assets they manage for you. You are the source of the payment that goes directly to the advisor. For example, an advisor might charge an annual 1% fee for planning and investment services. A 1% fee on $1,000,000 of assets would be $10,000.
Integra Insights: This fee model reduces possible conflicts of interest in commission compensation models.
The Commission-Only Model:
A commission-based financial advisor earns income by selling financial products like mutual funds and insurance products. They receive commissions from third parties (mutual funds, insurance companies, brokers/dealers) when they sell you the products.
For example, a financial advisor sells you a mutual fund to invest in your portfolio assets. The advisor receives a one-time commission from the mutual fund during the sale. In general, advisors are not paid recurring compensation for ongoing services.
Integra Insights: This is not a free lunch. The commission cost is factored into the recurring cost of the mutual fund.
CERTIFIED FINANCIAL PLANNER™ professionals are compensated with a combination of fees and commissions in a fee-based model. They may charge a fee for their investment advice and services. They may receive a commission if a client requires insurance products (life, long-term care, disability) to protect them from certain risks.
Hourly Rate Model:
Some CFP® professionals, like a CPA or attorney, charge by the hour. This model is typically favored by clients who only require a few hours of the financial advisor’s time. They receive the advice and services they need without committing to a recurring service.
You may pay a fixed ($2500) fee for a specific service – for example, a financial plan. Or, you may pay a fixed monthly subscription fee ($200) for the same service. Some financial planners may charge a fixed fee for their planning services and an asset-based for their investment advice and services.
Integra Insights: Be extra cautious when financial advisors claim their planning services are free. This usually means third parties pay them, and commissions cover their planning expenses.
At Integra Wealth, we believe in being fully transparent with our clients about our total costs. As financial fiduciaries, we offer a variety of fee structures to meet your specific needs. This helps us align your needs with the way we are compensated.
We also believe in documentation. Our clients should not rely on verbal information when selecting our firm for planning and investment services.
Our top priority is establishing lasting client partnerships based on full transparency and fairness.
The Importance of Working with a Fiduciary CFP®
If you have been managing your money yourself or are considering changing financial advisors, engaging with a CERTIFIED FINANCIAL PLANNER™ who is a financial fiduciary is crucial. Financial fiduciary CFP® is legally obligated to always act in your best financial interests. This is the highest ethical standard in the financial service industry.
Integra Insights: Do not assume all financial advisors are fiduciaries. They are not. Ask them to document their fiduciary status in writing.
A fiduciary standard makes trust and integrity an important part of the relationship. You must receive the advice you can trust to help you protect and nurture your wealth over time.
Integra Insights: With over three decades of hands-on experience in the financial services industry, we founded Integra based on a conviction that there was a scarcity of advisory firms providing objective wealth services that prioritized the financial interests of investors.
We’ve built a dedicated team of fiduciary advisors who share our core values and demonstrate a fervent commitment to helping you achieve your goals.
Why Conflicts of Interest Matter, Especially as a High-Income Earner
When it comes to your money, it pays to understand how conflicts of interest in financial planning matter because they can significantly impact the quality and objectivity of the advice you receive.
A financial professional who stands to gain a hefty commission from selling a particular product may be influenced, consciously or unconsciously, to recommend it over another product that may be better suited to your needs. This is a potential conflict of interest because the advisor puts his or her interests first.
This is particularly relevant for high-income earners in Paramus, NJ. You are creating substantial wealth, and your financial needs are increasingly complex. An advisor with a potential conflict of interest may not be equipped to provide the unbiased, objective advice you need to achieve your financial goals.
You want to find a financial planning firm that is transparent about its fees and provides full disclosure for potential conflicts of interest.
Be sure to ask potential advisors how they are compensated, who compensates them, and what you receive for the compensation. Ask the same question about their fiduciary status, and always ask for written responses.