There are two types of financial planners. The first is a commission-based financial adviser. They earn a commission from the products sold to clients. In standard practice, they do not charge consultation fees because they get paid when clients sign up for their products.
The other type of planner charges fees only. They are not tied to any provider of financial products. They are independent and can source the best products from any company that suits the client’s situation.
How a financial planner should be paid
Financial planners are professionals, just like doctors, lawyers, engineers and so on. They render services to clients in exchange for fees.
However, most people find the remuneration is not promising for a full-time career compared to other professionals.
The reasons are a lack of awareness of financial planning and the services planners offer as well as a lack of urgency to sit down and plan one’s finances.
Someone who is ill visits the doctor, who will examine them, diagnose the illness if any and advise the patient on how to get well again.
Similarly, a person facing a legal issue, say, wanting a divorce, would approach a lawyer.
However, when a person is in financial difficulty, they are unlikely to seek help from a financial professional. Some people do not even share such difficulty with their spouses and prefer to keep it secret.
Most people treat their financial problems as intensely personal. Frankly, for those who are already in financial trouble, such as experiencing cash flow problems or difficulty in paying off monthly debt commitments, there is not much a financial planner can do.
Managing conflict of interest
Most people believe there is no conflict of interest in seeking a fee-based financial planner’s advice. But in most countries, it is difficult for independent financial planners to survive on consultation fees because of the low level of consumer awareness.
A planner who wishes to make more money would sell products with a higher commission, which are not necessarily the best products for their clients.
One way to strike a balance is by charging adequate fees for the services provided and then reimbursing the client if the financial products are purchased.
Producing financial plans is not an easy task, it is time-consuming. It takes in-depth study to construct a financial plan. It is not that a single plan can fit every individual, but different programmes are tailor made for different individuals’ circumstances.
After a tough and long process, a single unique financial plan is produced, which is ideal for the person concerned.
During preparations for the Registered Financial Planner qualification, in the final module, a complete financial plan must be produced. That can take many weeks, especially during the data gathering phase.
The client has to provide all their financial statements and transaction records for analysis. The process takes weeks, and sometimes clients give up halfway because of the hassle.
Looking at the scope of work required, if financial planners are paid little for the job, it does not make business sense to carry on the practice.
Due to the low level of awareness, clients do not line up for the services of a financial planner, as one would see outside the office of a famous doctor.
Therefore, financial planners do spend a lot of time on marketing and building rapport.
Ideally, a truly independent financial planner should not be tied to any products. They should not endorse any product in any manner whatsoever.
The financial planner must not keep their own interest in mind while creating a financial plan but should make the benefits to the customer the priority and create a financial programme according to the interests of the client.
After many years in the financial industry, the changes are not encouraging. At the time of writing, it is tough to find a truly independent financial planner.
It is a typical dilemma that most financial salespeople are juggling in the spaces between full-fledged independent adviser and commissioned agents for specific products.
This article first appeared in kclau.com.
KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.