Navigating the world of financial planning services can feel like a maze these days. It’s important to get a handle on the different ways planners get paid so you can make smart choices about your money. Fee-based financial planning has emerged as a popular option for being transparent and centered around what’s best for you, the client.

What Is Fee-Based Financial Planning?

In fee-based financial planning, planners get paid directly by you, whether that’s through hourly rates, a flat fee, or a percentage of the assets they manage (assets under management or AUM). This differs from commission-based planning, where planners are paid based on the products or transactional services they sell, like insurance policies or stock trades. Fee-based planners may still receive commissions for specific recommendations, but their primary income comes from client fees.

This approach removes a lot of the (perceived or actual) bias associated with specific sales commissions, allowing fee-based planners to better tailor solutions to your goals and needs vs. what they have available to sell. This may cover all aspects of your financial life, including investment planning, tax strategies, retirement planning, estate planning, risk management, and more. Going this route means you get comprehensive help that’s all about you, without any pressure to buy specific products.

The Evolution of Fee-Based Financial Planning

The fee-based model is relatively new but has gained traction due to potential conflicts of interest inherent in commission-based services. Clients (and regulators) were concerned that the pressure associated with commissions and sales goals could sometimes lead to advice that wasn’t always in the client’s best interest. For example, an advisor might nudge a client towards products or transactions that earned a higher commission rather than what was actually best for the client.

The Investment Advisers Act of 1940 is a federal law that defines, regulates, and monitors investment advisors. While it was initially established based on lessons learned from the 1929 stock market crash, more recent updates have supported the need for certain advisors to act as fiduciaries. This means they’re legally bound to act only in their client’s best interests, including full fee disclosure and transparency. More planners are adopting fee-based or even fee-only models to avoid any perceptions of conflicts of interest. They’d get paid for their advice directly rather than through commissions, ensuring complete focus on your best interests.

Advantages of Fee-Based Financial Planning

At Vita Financial, we believe there are several advantages to a fee-based approach to financial planning.

Fee-Based vs. Other Compensation Models

Understanding the different ways planners get paid can help you choose the best option. Commission-based planners are paid for the financial products and transactions they sell. On the other hand, fee-only planners operate on a purely advisory basis, eliminating commissions.

Fee-based financial planning fits right in the middle. It offers a transparent, client-centric approach that mitigates conflicts of interest, provides comprehensive advice, and ensures financial strategies are tailored to individual needs. Understanding these differences is important to making informed choices for your financial future as economic conditions change. 

Schedule a no-obligation introductory meeting with our team to learn how Vita can help you determine the best way to approach achieving your financial goals and future.