Any professional that you work with for financial planning is going to be compensated for the work they do, but there are different ways they earn their pay.
Whether it’s worth it to you is another question. If you have enough knowledge and time on your hands, and your investment portfolio is not very complicated, you may be able to manage it on your own. This can save you some money on financial advisor fees.
Some advisors do not require you to spend money out-of-pocket on their services: their compensation comes from commissions and fees built into the investments and financial products they recommend.
While it may seem that this is the most appealing option, the commission-based compensation model has some drawbacks. One is that the products may have higher fees than otherwise, since the advisor’s compensation is built into the product, which can affect your rate of return.
The other is that there is an inherent conflict of interest, to some degree, between the need to do what’s best for a client and the need to receive compensation for the work done for the client by placing them in specific investment products. (See — Fiduciary Standard)
This can be easily demonized, but it’s important to remember that financial advising, and financial products are in an extremely competitive industry run by people who understand supply, demand, and value; if you are with a reputable and competitive advisor, broker-dealer, or custodian, it’s likely that you’re getting a decent deal.
Some financial planners will charge you an hourly fee for consultations, and then most likely a percentage fee for the assets under their management (AUM), which is normally around 1% - 2%.
The main benefit to this structure is that all fees are disclosed up-front. Planners like this are known as fee-only. Those that receive commissions as well as fees, perhaps depending on which products they sell, are known as fee-based. The category of advisor that only makes commissions is called commission-only, naturally.
We would probably advise you to consider a Financial Planner who charges fees for his services, and not one who receives commissions for the investments he or she recommends.
You might have to interview advisors and ask them if they earn commissions. CFPs hold a designation that ostensibly adheres to a “fiduciary standard,” but they have the ability to earn commissions as well as charge fees for their services, in which case they are only fee-based.
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