The question of how a financial planner gets paid is a particularly important one as you establish a relationship with your planner. You do not want to be plagued by a nagging fear that your planner recommends products for the commissions they generate rather than for their appropriateness to your situation. In theory, financial planners have an ethical obligation to hold your financial interests above their own, but the incentive structure can make that philosophy difficult to execute.

Planners are compensated in four basic ways: Commission only. Such planners offer free consultation and profit only when you buy a product, such as a mutual fund, an annuity, or a life insurance policy. In some cases, the commissions are explicit—for example, a 4 percent front-end load on a mutual fund. In other cases, the fees are lumped into the general expenses of
the product, as with life insurance, so you won’t know how much your planner makes unless you ask him or her. Because a planner who works on commission collects only if you buy, remain aware of his or her incentives as you consider the planner’s advice. When you interview such a planner, ask him or her approximately what percentage of his or her firm’s commission revenue comes from annuities, coins and other tangibles, insurance products, limited partnerships, mutual funds, and stocks and bonds.