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Financial Services Compensation and the Value Proposition of the Financial Planner

By Martin Casals Iglesias, CFP

I understand the way financial planners are paid is one of the main issues to consider when we think of how we want to be seen by our clients and society in general. In the end, it is appropriate that our form of remuneration is perfectly aligned with our value proposition.

I think financial planning is a journey that begins where we are today, and ends with the achievement of our objectives, our dreams and desires for ourselves and our families. A financial planner is a professional that helps to reduce the risks of not achieving our objectives. He guides the client in this journey, helping to create healthy habits of consumption and savings, in the adequate choice of investment products, insurance, support in relation to the succession and so on.

That is the point: a financial planner is not a product-seller, but a companion on a walk or a partner. Therefore, it is not desirable to be paid according to product commissions. This practice is contrary to a financial planner’s value proposition. That would be similar to a doctor getting paid off pharmaceutical commissions (following the excellent comparison of my colleague, Patrick Canion, in his last article).

Assets Under Management Fees 

Compensation, based on total assets under management, does not seem appropriate either. At the end of the day, it is not part of our work to maximize returns in a portfolio. This is the role of portfolio managers.

The best way, in my view, is a clear effort made by the planner to differentiate what our job is (financial planning advice) and product-selling. Like the doctor, who charges for their work and indicates a prescription drug. There is no doubt, in the patient’s mind, that there is a difference between those two things.

Thus, I believe that the best way for a financial planner to be compensated is to charge per consultation, where the client pays an annual or monthly fee to meet with the planner. Both parties should also verify if the path toward the attainments of objectives is being trodden correctly. The planner should propose amendments whenever the targets are moving away by unexpected life events or volatility in the markets.

Brazil is in the early stages of its financial planning profession and my independent colleagues experience difficulty of charging clients for advice instead of product commissions. I know that in other parts of the world this difficulty also exists.  If planners are unable to charge for their service, it may reflect a difficulty in explaining exactly what we do and what our value proposition is.

Some of the issues which I discuss in this paper were also mentioned in my previous article “Lessons from Literature: What Financial Planners Can Learn from Shakespeare and Voltaire.”

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