How—and how much—to pay a planner

How—and how much—to pay a financial planner

More goes into an adviser's fee than you may think. Here'show to sort it all out.

By Brad Burg, Senior Editor

Thinking about using a financial plan ner? If you've made any inquiries,you may feel as though you need a planner to help choose your planner. Simplysorting out how you might decide to pay for this service can be enough togive you a headache.

Planners, unlike money managers, don't just supervise your investments.Most advise you on all financial matters, from soup--insurance, say--tonuts--such as the tax rules. Within this field, though, there's a greatdivide on the question of charges. Some planners make their money by sellingyou products on commission. Others charge fees--often an annual amount basedon a percentage of the assets involved. Some planners use a combinationof the two.

Which approach might be best for you? To decide, you need to know someof the details, including the variations within each approach.

How does a planner work on commission?

A commission-based planner who advises you on, say, mutual funds receivespart of his payment when you buy some of the products he recommends. Thosecharges may be minimal, depending on how you invest. "Suppose you'repaying a 4 percent load," says Robert Doran, a planner in West Milford,NJ. "On $10,000, that's only $400--and remember that you might holdthe product for 10 years. Now, if you're trading a lot, such costs can addup, but people working with planners are usually investing for the longterm. Those costs won't be huge unless they occur frequently."

But you certainly should ask your planner to clarify exactly what thecommissions are, when you're comparing products. Commissions for life insurance,for example, can be many thousands of dollars. Without knowing the figures,how will you recognize that a personal economic benefit might cause a plannerto prefer one policy over another?

Planners who charge commissions contend that their economic incentivescan work to investors' advantage. They say that it means closer links tofinancial products, which can mean knowing them in more depth. "Typically,selling on commission means you have ongoing relationships with certaincompanies, which gives you a useful perspective on their products,"says Lewis Wallensky, a Los Angeles planner.

Planner Mary McGrath of Champaign, IL, concurs. "Any planner cancompare a whole range of disability insurance policies; but when I recommendcompanies, I know from experience how cooperative they are in paying claims."

How do the fee-only people charge?

Fee-only planners make no money from commissions. Instead, they typicallycharge 1 percent of the first $500,000 or $1 million of assets they managefor you, dropping to lower percentages on higher amounts. McGrath cuts herbasic 1 percent rate to 0.6 percent on amounts over $1 million. Al Zdenek,of Flemington, NJ, drops to 0.5 percent, but on amounts above $5 million.

Even more variations exist. Not all planners base fees only on assetsthey're supervising. John Sestina of Dublin, OH, charges a percentage ofa client's total portfolio. "I charge for comprehensive planning, andthe size of the total portfolio indicates the level of service required,"he explains.

Or you might find a flat fee involved, too; Zdenek usually charges sucha fee for comprehensive financial planning. "I feel planning shouldbe separated from asset management," he says. "They're differentjobs that require different resources." His typical annual fee is around$4,000 for comprehensive financial planning advice, plus an asset-managementfee for investment advisory services.

Gary Schatsky, who has offices in Albany, NY, and New York City, baseshis charges on "many factors, from the amount of assets to how variedthey are and how much management is needed." He does note, however,that his annual fees frequently approximate 1 percent of assets.

Using a fee-only planner doesn't necessarily mean you avoid all commissions.With some products, there's often a built-in commission. "That's trueof most life insurance products," says Wallensky, "in