Frequently Asked Questions

1. How are financial planners compensated?
Financial planners are compensated in a number of ways. Many financial planners will tell you that the method of their compensation should not be a concern to their clients. I disagree.

I feel that it is critical to understand the compensation method of your advisor so that you can be clear about what may be motivating him or her to give you the specific advice you receive.

Some common compensation methods:
Commissions: The advisor receives a percentage of the money you invest (typically 1-5%). This is commonly seen in mutual funds that charge a "load". If you invest $10,000 in a 5% load fund, $500 of your investment goes to the advisor or the company off the top, and the remaining $9500 is actually invested in shares of the mutual fund.

Fee-Only: Fee-only financial advisors charge clients a set hourly rate or fee for a specific service, such as a financial plan.

Percentage of Assets: A planner receives a specific percentage of the total assets under management each year. This percentage is typically 1-2%. So if your portfolio was $400,000 at the beginning of the year and your advisor charged a 2% fee, you would pay him or her $8,000 to manage your portfolio for a year.

2. Why do I need a financial plan?
A financial plan is an important element to controlling your financial future. Statistically, those who establish a formal, written financial plans are much more likely to stick to it and achieve financial success. It is also important for you to look at all of the elements of your financial life, to ensure that the risks to your finances are known and minimized as much as possible.