What Are the Costs of Financial Planning?
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Costs of Financial Planning
Financial planners can get paid in a variety of ways. None of these compensation methods are necessarily better than another but it is important to understand the costs of financial planning. The important thing is to have a clear explanation and understanding about how your particular advisor is paid, including full disclosure of any potential conflicts of interest.
Fee-only financial planners may charge either an hourly or flat fee, or if investment advisory services are also provided, the fee may be asset- based (i .e. a percentage of the assets subject to the investment advisory services). Fee-only planners do not receive commission compensation and are not licensed to do so.
Fee-only is not to be confused with fee-based. Fee-based financial planners may also charge hourly or flat fees, and may also charge asset-based fees for investment advisory services. In addition, fee-based planners may be registered to receive commission compensation for things such as investment or insurance products. The potential for conflict of interest may exist if a financial planner charges a fee for planning advice that leads to product implementation upon which they also receive commission compensation.
Some planners are paid solely by commissions. They do not charge fees for their planning services and rely upon implementation using financial products that compensate them. Often these planners are not registered to provide financial planning on a fee basis.
Most CERTIFIED FINANCIAL PLANNERS™ (CFP®s) are compensated like any other consultant, CPA, or attorney. Although most CFP®s prefer to quote project fees, those fees are typically based upon their estimate of the time required to complete your project. Their goal is to provide the most benefit to you for the amount of time required. This is usually determined by an assessment during their discovery process of getting to know you, your affairs, your goals, and your expectations.
As a rough guide, a comprehensive review of your financial affairs and goals, development of strategies, delivery of recommendations, and assistance in implementing those recommendations may cost about ½ of 1% of your total net worth during your first year. So someone with a net worth of $5 million should expect fees to start at about $25,000. Someone with a net worth of $10 million should expect about $50,000 in first year fees. At every level, the cost of planning should result in substantial benefit from both basic and advanced estate planning strategies that have the potential to save significant amounts of income and estate taxes, as well as accomplishing other financial goals.
Some financial planning professionals include their financial planning fees within the Asset Management Fees that they charge to manage your investment portfolio. However, the trend is to move away from this type of billing as it is not always in the client’s best interest. The complexity of providing ongoing comprehensive planning is not necessarily linked to the size of someone’s investment portfolio.