Farrell: How to pay for the best financial planning advice

Q: Many experts recommend hiring fee-only financial planners. I get that a fee-only planner can be paid hourly or flat rates. Can a planner who is paid a percentage of the investments be considered a fee-only planner?

Cathy

A: Let's review the main kinds of compensation for financial planners and advisers. The bottom line is that you should have a clear understanding of the fees being charged. If not, run away.

Some advisers make a living off commissions, a charge imposed on buying and selling stocks, bonds, mutual funds and other securities for clients. Fee-based planners charge a mix of fees and commissions. The planner usually earns a fee for creating a financial blueprint. The planner earns commissions by handling transactions for investment products recommended in the plan. Some advisers get a salary plus bonuses. The bonus is for selling specific investments, such as particular mutual funds.

The fee-only planner makes money in several ways. The hourly fee and the flat fee are typical charges for creating a comprehensive financial plan and for follow-on advice. Fee-only planners don't make a commission off investments and financial products that they suggest you own.

The main source of income for most fee-only planners is at the heart of your question: managing money for clients. The charge is typically based on a percentage of assets that they manage for you. The charge is also called a retainer fee. Here the issue is not only paying for the plan; it's whether you want the firm to manage your investments. So yes, fee-only planners do manage money and get a retainer for it.

I'm biased in favor of fee-only and against commission-influenced pay, fee-based compensation and similar payment methods. Fee-only doesn't guarantee that you're getting objective advice, but it definitely improves the odds.

The terms "planner" and "adviser" are used loosely. You should seek out professionals with the sort of credentials that signal broad knowledge. Among the best known are certified financial planner (CFP), personal financial specialist (PFS) and chartered financial analyst (CFA). You'll also want a planner who adheres to a "fiduciary standard," a requirement that the adviser put the client's interests first, ahead of the planner's economic interests.

Many brokers and advisers are held to a much looser standard, the "suitability" guideline. Their investment ideas must be appropriate or suitable for the client. For instance, it isn't suitable for a broker to persuade an 80-year-old investor to buy a handful of junk bonds. That standard doesn't cut it anymore, not when it comes to your hard-earned savings.