How are financial planning firms typically paid and why does it matter to me as a job seeker?
As a national recruiting firm specializing in placing financial advisors within their first five years in the business, we frequently see candidates that are unaware of how financial planning firms are paid. The financial services industry is riddled with jargon and complexities that make it increasingly difficult to understand the differences between firms. Understanding the entire anatomy of a financial planning firm is essential to finding the right firm for you and compensation is an important component to getting the full picture.
How do financial planning firms get paid?
In financial services, although there are many ways a firm can generate revenue, there are two primary ways firms accept compensation:
• Commission: Commissions are payments made by a company to an advisor upon the sale of a financial product. The types of financial products can range from insurance products to mutual funds to annuities and more. Under this basis of compensation, everything is tied to production. No sales = No income.
• Fee-For-Service: A fee-for-service is a payment made by a consumer/client to a financial advisory firm in exchange for a service. This is similar to how professionals in other industries are compensated. This type of arrangement can be made in several ways:
o Hourly Rate: Firms are paid a flat hourly rate in exchange for time spent doing financial analysis and meeting with clients.
o Fixed Retainer Fee: Firms are paid an ongoing fixed fee for a set level of advisor services, which could include investment management, financial planning, and access-as-needed to the planner, without change in fees paid.
o Assets Under Management (AUM): This compensation model is based on assets a financial planning firm is investing for clients and will vary based on market performance, savings rates, or withdrawals.
From these different avenues of compensation, three primary distinctions are used to define how firms receive revenue. While the exact definition varies across different organizations, like the CFP Board and NAPFA, firms can be categorized as Commission-Only, Fee-Based, or Fee-Only.
A Commission-Only firm is one that does not take fees directly from clients. All revenue generated by the firm is derived from companies in exchange for selling a financial product to a client.
A Fee-Based firm is one that accepts both commissions and fees-for-service. These activities can be independent of one-another, having some clients on either commission or fee-for-service, or have overlap where a firm receives both a commission and fee from a client for the services rendered. In evaluating a fee-based firm, it is good to ask questions to determine where the firm lies on the spectrum – are they doing more commission or fee-for-service work?
A Fee-Only firm accepts compensation solely from fees paid by clients. There are no commissions earned, referral fees, kickbacks, or any other compensation.
Why does it matter?
Typical conversations around industry compensation models are focused on consumer awareness and needs. As a job seeker, use the elements of a compensation model as a litmus test to gain insight to the firm’s approach, focus, and culture.
Compensation can be insightful to the types of relationships a firm fosters with its clients. A firm that is more commission driven tends to be transactional in nature with a propensity for sales. Often, they are working with a higher number of clients with a wider range of needs and means. On the other end, a fee-only firm tends to have a more relationship-based approach with clients, lending itself to working with a smaller number of clients in a more personal manner.
The popular adage ‘You get what you pay for’ tends to hold true throughout financial services. As a job seeker, are you looking for a firm that is focused on investments? insurance? financial planning? Look at how firms are being paid to determine their focus. Firms that receive all revenue from commissions tend to have extensive expertise in a specific topical area. For example, those selling insurance are probably more focused on insurance than other financial areas. Fee-only firms tend to be more comprehensive financial planning or investment management focused since clients are paying them a fee for their expertise, often tied to net worth or assets.
One of the buzzwords common in the financial planning industry has been “conflicts of interest.” Firms have been seeking out ways to minimize their perceived conflicts of interest to clients. While each compensation model has its own inherent flaws, the industry has been trending towards the fee-based and fee-only models, where advisors take a fiduciary responsibility to act in a client’s best interest. In short, proponents for the fee-only model feel accepting commissions can incentivize an advisor to make recommendations to clients based on the additional compensation they stand to receive. Fee-based advisors often have strong reasons for selecting a given model such as client demand, an increased rate of client implementation, and to provide a more concierge service model for financial products their clients need. These firms often have internal controls in place to disclose and manage any potential conflicts of interests.
What should I pick?
Your decision to join a firm and buy into its compensation model should be driven by your own philosophies. There is no right or wrong answer. The choice is different for everyone. At New Planner Recruiting, we work with firms that are financial planning focused offering salaried, non-sales opportunities to newer planners.
Compensation model should not be a blind qualifier or disqualifier of a firm. Use the terms fee-only and fee-based as they were intended, as a uniform educator and high-level explanation vehicle. It is not a replacement for the questions job seekers should ask to understand the actual sources and amounts of compensation earned. Discover what is important to you – what aligns with your personal, cultural, and business values – and find a firm that matches. Contact us to talk through your career search and find your ideal fit.