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Compensation and Conflicts of Interest for Financial Planners
Realize that the planner is in business to make money. When you first visit or contact the planner, ask if there is an initial consultation charge. Then, find out exactly how the planner will be compensated, including any charge for a follow-up review. Ask for a written schedule of fees or other remuneration the planner will directly or indirectly receive in connection with the services to be furnished to you. Here are four major ways that planners are paid:
Fee Only
Fee only planners are paid strictly for advising you, whether or not you act on the planner's advice. The planner may be compensated at an hourly rate or by project.
Fees and Commissions
Some planners receive a fee for drawing up the financial plan and commissions from third parties for implementing it. For example, a planner may receive a commission if you invest in shares of XYZ Fund following a recommendation to that effect by the planner. Whenever a planner receives a commission or other remuneration, such as a referral fee, from a third party, this creates a potential conflict of interest for the planner. A question arises concerning whether the planner can give you unbiased, objective advice if he or she has a potential financial stake in the outcome. For this reason, securities regulators require that planners rendering investment advice on securities give you full disclosure regarding any such conflicts of interest, including compensation arrangements with third parties.
Commission Only
Here, the planner only receives remuneration from a third party if he or she sells you a financial product. Conflict of interest problems are most prevalent here. The planner should disclose to you if he or she will be receiving fees or commissions or if he or she has any other vested interest in the recommended financial products. For example, a financial planner who sells you a portfolio of rare coins may charge a mark-up which is in addition to the product's commission. If the planner will use a securities brokerage firm to implement the recommendations for you, you are entitled to know how the planner is affiliated with the firm. For example, is the planner an agent of the brokerage firm and, if so, is he or she registered with the Division as such?
Wrap Fee Arrangements
A wrap fee program provides an investor with a number of investment services for a single "wrap" fee. Some planners may receive a portion of the wrap fee paid by a client to a financial product sponsor. If so, the planner should tell you that its services are being provided in connection with a wrap fee program and give you the names and sponsors of the programs. In addition, if the services the planner will provide to non-wrap fee clients differ from those which will be furnished to wrap fee clients, the planner must tell you about the differences.
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