When it comes to financial planning, it's essential to understand the different compensation structures of advisors. Commission-based and fee-only financial planning are two popular models that offer distinct approaches to serving clients' needs. In this blog, we will explore the key differences between these two approaches, helping you make an informed decision about which one aligns best with your financial goals and preferences.  

Compensation Structure

Commission-Based Financial Planning                                                      

• Advisors earn commissions from the sale of financial products
• Compensation is tied to the products client's purchase
• Potential for conflicts of interest due to incentivization to sell specific products                                        

Fee-Only Financial Planning

• Advisors are compensated directly by clients through fees
• Fees can be charged hourly, as a fixed fee, or a percentage of assets under management
• Transparency and objectivity are emphasized, as the advisor's compensation is not tied to product sales

Objectivity and Fiduciary Duty

Commission-Based Financial Planning

• Advisors have a legal duty to provide a suitable recommendation but not necessarily the best recommendation.
• The focus may be on selling specific products rather than holistic financial planning
• Objectivity can be compromised, raising concerns about the best interests of the client

Fee-Only Financial Planning

• Advisors are legally bound to act as fiduciaries, prioritizing the client's best interests
• Recommendations are unbiased, considering a broader range of options and strategies
• Holistic financial planning is emphasized, addressing multiple aspects of a client's financial situation

Range of Services

Commission-Based Financial Planning  

• May have a narrower range of offerings focused on products they can sell
• Expertise may be concentrated on specific products or areas of specialization
• Limited emphasis on comprehensive financial planning

Fee-Only Financial Planning

• Offers comprehensive financial planning services tailored to the client's unique needs
• Provides a wide range of services, including retirement planning, investment management, tax planning, estate planning, and more
• Holistic approach helps clients achieve their financial goals and adapt to changing circumstances

Transparency and Client-Advisor Relationship

Commission-Based Financial Planning

• Clients may not have upfront costs for advice, but fees are built into the cost of financial products
• Ongoing service levels may vary, with a focus on clients generating higher commissions
• May have a narrower range of offerings focused on products they can sell

Fee-Only Financial Planning

• Transparent fee structures clearly state the costs of services
• Clients have a clearer understanding of what they are paying for and the value received
• Strong emphasis on building long-term relationships, providing ongoing support, and monitoring progress towards goals

Conclusion

Choosing between commission-based and fee-only financial planning depends on your preferences, financial goals, and the level of objectivity and comprehensive planning you seek. While commission-based planning can offer transactional services, fee-only planning provides independent, unbiased advice, and a holistic approach.  

At Provident Financial Planning, our flat fee model removes any conflict of interest and reinforces our holistic unbiased advice for all financial matters. Schedule a complementary appointment today to discuss your investment portfolio, tax strategy or retirement plan.

Blessings,

Bavley Bebawi

Provident Financial Planning Intern

intern@providentfp.com