Before making investment decisions, it is always recommended to consult a certified financial planner. But be advised that these conversations with your financial adviser can be costing you a lot of money, and you may not even realize it.

Financial advisers do not work for free. They make money off you, the client, in one form or another. How they make their money varies, and they may not be compelled to make you any richer.

How investment advisers are paid is an important factor to understand and consider when searching for the best person to give you money advice. Typically financial planners are either commission based or charge a fee based on the workload.

• Commission Based: Commission based financial advisers are paid the sales load you are charged from products they recommend and you purchase.
• Fee Based: Fee based financial advisers are paid by a pre-determined fee for their services. This may be an hourly fee, a flat fee or a percentage of the assets they are managing.

While both pay structures have their plus and minuses, there seem to be some overwhelming benefits to using a fee-based financial planner. Take this example from Investopedia.com:

Making a $50,000 investment in a fund with 5% load would translate into the equivalent of more than 14 hours of portfolio planning undertaken by a fee-only adviser at $175 per hour! If you were to hire an adviser for 14 hours at that rate, you could expect him or her to accomplish a great deal of work that would produce a more balanced portfolio, returning a potentially higher rate than the loaded mutual fund. The fee-only type of compensation provides investors with the opportunity to get more service out of the money they spend on professional advice and stock-picking expertise.

Since commission based advisers are paid from the products they sell, they have an incentive to promote frequent transactions and recommend products that pay them the maximum trading commissions. Customer-focused commission based financial planners would want to produce a high-performance portfolio in order to keep your business, but be wary of those who are ultimately concerned with their bottom line. Their interests are with getting you to do more buying and selling.

Fee based advisers, on the other hand, are not financially vested in selling you a specific product outside their own services, and may be more in the client’s best interest. They are said to provide more objective financial advice. They could try and stretch out the time they spend working on your portfolio in order to make more money, but a good adviser will have enough on their plate to keep them busy.

When is it appropriate to use a one type of adviser over the other?

While fees and pay structure should be considered, it should not be the only factors when choosing a financial planner. A financial planner that is well-rounded, experienced and can back up his work with a history of high performance should be first and foremost. Integrity and an honest, open relationship is also important.

Otherwise, commission based financial advisers may be more suitable for people with smaller portfolios and those just starting out with their investing career. The fees and charges you incur with a limited capital to invest with will be largely insignificant in the long run.

Since fee based financial advisers are generally more capable at looking at your portfolio as a whole, including real estate, they are recommended for those who have a larger portfolio. A large investment portfolio requires more attention to detail, and frequent monitoring of asset allocation, and a fee based adviser will provide more bang for the buck. Likewise, this type of adviser may be better for those who need one-time consultation for more complex situations, such as estate and tax planning.

Millionaire Money Habit: As investment decisions are made, it is important to consider fees and tax implications when choosing an appropriate financial adviser. While the pay structure should not be the only factor to be considered, it is an important part of the details. -RT

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