commission the way you can see, for example, a real estate
broker’s take when you sell a home. The size of the com-
mission is often reflected only in the penalty you pay if you
try to get your money back before the insurance company
has had time to recoup the commission.
Obviously, a planner who works on commission would
want to sell you products that yield the highest commis-
sion—typically, load-carrying mutual funds, hedge funds,
private investments, and a host of insurance investments,
ranging from annuities to universal life. A commissioned
planner at a big financial firm like Merrill Lynch, Wells
Fargo Advisors, or MorganStanley SmithBarney might
also be under pressure to make a sales quota or to sell par-
ticular investment products the firm wants to sell, wheth-
er or not they’re the best investment for you. This is not to
say that all commission-based planners are out to rip you
off; they’re not. And if you don’t have more than $100,000
or so to invest, commission-based planners may be the
only ones who will take your business. But the conflict of
interest is particularly stark in the commission business.
Another model is fee-based financial planning, which
has been gaining ground on the commission model. (About
one-third of FPA members say they work for fees only, no
commissions.) In theory, charging you 1 percent of your as-
sets each year aligns our interests with yours: We have no
incentive to sell you a particular investment just because
it brings us a higher commission than another, and if your
portfolio grows, so does our fee. But there are still conflicts.
It encourages us to capture as much of your money as we
can. That’s why few of us will ever tell you to pay off your
mortgage: Using $100,000 to discharge a loan rather than
investing it could cost us $1,000 a year in fees. The fee
model also limits where we advise you to invest, since we’ll
favor putting you in products set up to pay us automatically
each quarter. Few planners will tell you about, say, a higher-
paying certificate of deposit at a bank, because banks don’t
pay planners. You’ll have to find such investments yourself.
( DepositAccounts.com and Bankrate.com both let you
compare yields for accounts at banks and credit unions.)
Some of us make money from both commissions
fees. One CFP whose work I reviewed made a huge com-
mission when he sold his client an annuity, then charged 1. 6
percent annually to “manage” it. Between the commission,
planner’s fees, and ongoing costs of the annuity, the client
was handing over a whopping 5. 29 percent annual fee. Still,
the CFP Board did not publicly discipline the planner.
The compensation model I follow is comparatively rare:
charging by the hour. I chose it because I didn’t trust myself
to be nobler than my colleagues at resisting the financial
incentives of the other two models. That said, the hourly
model isn’t the best choice for everyone. It’s not cheap:
I charge up to $350 an hour. Other hourly planners can
be found through the Garrett Planning Network, a group
of more than 300 planners who generally charge $180 to
$240 an hour. (I am not a member of this network.) Hourly
planners aren’t immune to conflicts, (CONTINUED ON PAGE 68)
ways to get
“Trust but verify.”
That motto is also
good advice for those
seeking financial tips.
Here’s a plan for
keeping it honest.
If you are going to meetwith aplanner,
first check his or her pro-
fessional credentials on-
line to see whether they
are serious, hard-to-get
CFP or CFA (chartered
Go to FINRA.org and SEC.gov
if regulatory actions have
been taken against your
planner, and see whether
he or she is registered
with your state securi-
ties department (NASAA
.org) and has any history
of complaints. If the plan-
ner sells insurance products, including annuities, check
your state’s division of insurance.
At your first meeting,
never commit to handing over any money. Think about it and discuss it with
others. If the planner pressures you into buying right
away, that’s a warning sign.
When your planner recommends
an invest- ment, ask if there’s a penalty for getting your
money back. If so, ask how much it is and how long
the penalty period lasts. Penalties are the best indi-
cator that your planner is getting a big commission.
Ask the planner to put down
in writing (a) why he or she thinks an investment is suitable for you,
and (b) the total cost you will be paying. Make sure it’s
well under 1 percent annually. If the planner refuses for
any reason, walk away.
Make sure you completely
understand any recommended investment and how it fits in your
strategy. To test your understanding, explain the invest-
ment to someone you trust. Does that person get it?
Reverse the roles.
Ask yourself how the planner and the issuer of the product can make money
and have it still be good for you.
Ask the planner whether
any certificates of deposit or money market accounts backed by the
U.S. government are paying more than your bonds
or cash are yielding. Go to DepositAccounts.com or
Bankrate.com to see if the planner is correct.
Watch for warnings:
Does the product look too good to be true? (For instance, does it promise
high returns “risk free”?) Are you asked to sign a
document saying you read hundreds of pages and un-
derstood what you read? Is the planner building trust
from affiliations such as belonging to the same church
or synagogue? Is the planner saying you must sign in
the next 24 or 48 hours?
Don’t put faith in references.
Even the worst planners can find three people who like them.
article text for page
< previous story
next story >
Share this page with a friend
Save to “My Stuff”
Subscribe to this magazine