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by Eve Kaplan, CFP(R) Professional

Data show Americans spend more time comparison shopping for TVs and other consumer purchases than they spend shopping for a Certified Financial Planner® professional. Of course most Americans have not comparison shopped for a Certified Financial Planner® professional – I’m only talking about the minority of Americans who have shopped for both TVs and planners!

Here are a several reasons:

  1. You may enjoy shopping for a consumer item, while shopping for a financial planner can feel like shopping for a new CPA, physician or dentist.
  2. Buying a TV is relatively straightforward but it can be difficult even to figure out how Certified Financial Planner® professionals charge for their services (let alone who’s a good fit with you/your needs). For example: “fee-only” and “fee-based”  Certified Financial Planner® professionals often were seen as synonymous but they are quite different in practice.

The good news is that The Certified Financial Planner Board of Standards just issued new compensation guidelines that govern the 68,000+ Certified Financial Planners. This should help clear up the compensation confusion since the way you pay an advisor may determine the quality of the advice you receive (more about this in a moment).  While it may not make finding a Certified Financial Planner® professional  “fun” per se, new guidelines should make it easier to understand which compensation model may be best for you (or not).

Here are the 3 different ways Certified Financial Advisors may be compensated:

  1. Fee-Only
  2. Commission and Fee (no longer called “fee-based”) and
  3. Commission

A fourth compensation category – “Salary” — was deemed meaningless by the Certified Financial Planner Board of Standards and was removed from the “find a CFP” search engines on August 16, 2013.

Fee-Only Certified Financial Planners® only can call themselves “Fee Only” if they do not receive any form of commissions from a related party. Fee-Only Certified Financial Planner® professionals charge fixed, flat, hourly, percentage or performance-based fees (the latter 2 on managed investment assets). This form of payment is the best way to minimize conflicts of interest and promote objective advice-giving; the CFP® professional doesn’t promote products that benefit him/her in any way. As a result, the Fiduciary Standard of “putting a client’s needs before the advisor’s needs” can be upheld.

By comparison, Certified Financial Planner® professionals who are paid by “Commission and Fee” receive –or are entitled to receive — both commissions and fees for professional activities. This used to be called “fee-based” – a very confusing term for the public and the media.

A “Commission” Certified Financial Planner is paid only via commissions.  Combining product sales with advice-giving means the clients don’t know if the advisor is pushing a product because it benefits him/her – possibly more than it benefits the client. The fiduciary standard of care may be a “suitability” standard which means the advisor does not necessarily need to put the needs of the client before his/her own needs. Commissioned CFP® professionals receive compensation “generated from a transaction involving a product or service…This includes 12b-1 fees, trailing commissions, surrender charges and contingent deferred sales charges.”

Who has the best compensation model? I believe it’s Fee-Only” because compensation is transparent and planners don’t mix advice-giving with product sales. Ideally, client needs always should come before the needs of the advisor. Isn’t that what good financial planning and investment management is all about?

Copyright (C) Eve Kaplan, 2013. All rights reserved.