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Financial Service Compensation Models Learned from William Shakespeare

Korean Financial Planning Professional Sunho KimBy Sunho Kim, CFP

On March 9, 2012, a public hearing was held, in the Republic of Korea National Assembly Lawmakers’ Hall, over a legislation on financial consumer protection. It is uncertain, due to the General Election on April 11, whether this act will pass before April, or have to wait until the next Assembly Session, to do so. Regardless of the timing of the act’s passage, however, financial planners, in Korea’s financial product advisory profession, have a lot to feel thrilled about. This is because the customary practice of being paid for financial services on the basis of an inter-personal consulting contract will be replaced by a legal provision guaranteeing compensation as a regulatory right. Then, in what ways will Korean financial planners be able to get paid by their clients? Varied business models in the U.S. will be able to offer good examples.

Compensation Models in the United States

In the US, compensation to financial planners are either commissions, a mixture of commissions and fees, or fees-only. Adopted chiefly by insurance and mutual fund sellers, commissions are paid on the basis of a product transaction. The mixture model allows the payment of both a commission and a fee. In certain cases, with this model, the amount of the commission offsets a certain portion of the fee. The commission model and the combination model are prone to tempting planners to recommend a product that may not serve clients’ interests, as they are based on a transaction of a product. The fee-only model was designed to prevent this conflict of interest. Fee-only includes an asset-under-management fee, which allows a fee to be set in a level comparable to an asset-under-management; a retainer fee, which is based on the difficulty of financial planning and the amount of time to be spent, rather than the size of an asset-under-management; and an hourly fee, which calculates the hours spent for the financial planning services.


John E. Sestina, often called the father of the fee-only model, claims that the fee-only basis is the best model as it prevents the conflict of interests with the clients. In contrast, Professor Deena Katz of Texas Tech Institute, takes a more flexible position,
arguing that the fee-only model is not an absolute good to be taken by everybody, but merely one of many remuneration models. A 2010-2011 edition of the survey on the financial planning salaries, by the U.S. FPA, reports that 40.5% of the companies are adopting the combination model (3/4 fee based + mostly or entirely fee-based), 33.8% fee-only basis, and 25.2% the commission basis (only transactional + 3/4 transactional + 1/2 transactional and 1/2 fee-based). Point being, the combination model is still the dominant model in the U.S.

The Merchant of Venice: Implications for Financial Planners

Which remuneration model will be the best for Korean financial planners? The answer will be based on the planner’s competence and desire, the client’s profile, and his or her company’s policy or individual policy. The choice can be learned from William Shakespeare. In the Merchant of Venice, the rich heiress Portia is bound by the lottery set forth in her father’s will, which gives potential suitors the chance to choose among three caskets composed of gold, silver and lead. If they choose the right casket – the casket containing Portia’s portrait – they win Portia’s hand in marriage. If they choose the wrong casket, they must leave and never seek another woman in marriage. The gold casket contains a letter stating “Who chooseth me, shall earn what everyone desireth,” the silver casket “Who chooseth me, shall earn what is comparable to his status,” and the lead “Who chooseth me, must give and hazard all he hath.” Which casket will a Korean financial planner choose when he or she has to decide on a remuneration model? Some may choose the gold casket to earn what everyone desires. Some others may choose the silver to earn a treatment comparable to his or her social status. Perhaps, only a few may choose the lead to “give and hazard all he or she has.”

Just as Shakespeare writes in his work that a love can not be earned without giving and hazarding all he has, so financial planners will have to stake their fate and everything they have in their choices. To wit, as long as they are willing to do so, it doesn’t make any difference whether the remuneration will be the transactional basis, the fee-only basis, or the combination. This is because we are CFP professionals, who put the clients’ interests as our first priority, and the leaders of the society who work to promote the clients’ financial well-being.

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