When it comes to working as a financial planner, choosing the right salary structure can be difficult. You may be wondering, “Should I go with a commission-based or fee-based structure?” or “Is it better to be a salary-based financial planner?”
In this article, we’ll discuss the three most common financial planner salary structures and help you decide which is best for you.
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Financial Planner Salary Structure
When it comes to financial planner salary structures, there are three main options: commission, fee, and salary. Let’s take a closer look at each one:
A commission-based financial planner earns a commission based on the total amount of products they sell to their clients. For example, if a financial planner earns a 3 percent sales commission on a RM1,000,000 investment from their client, they will earn RM30,000.
When working with clients, commission-based financial planners are typically paid on a monthly basis. This means that they can earn a commission on their products as soon as they sell them. However, if they don’t sell their products, they won’t earn anything.
The commission-based structure is the most commonly seen structure as this is a widely popularised approach by tied-agents from the insurance industry and unit-trust industry.
Pros: As a financial planner, you do not need to spend time explaining your fee structure. Most clients will understand the commission structure.
Cons: Because the commission-based structure is tied to selling products, it can be difficult to keep the interest of your clients. Clients can easily detect if you do not have their interest in mind.
A licensed financial planner is allowed to conduct financial planning activities and charge a fee for the service rendered.
Fee-based financial planners earn a fee from the advisory service they offer to their clients. Instead of providing free advisory service in the hopes of getting the client to buy a product, fee-based financial planners charges an (i) upfront fee during the initial engagement and a (ii)recurring fee for managing the client’s money.
Fee-based financial planners charge an upfront fee where they receive a fixed fee. The fixed fee is usually based on a percentage of the client’s account size. For example, a financial planner may charge RM1,500 – RM3,000 for the initial consultation and RM300 for every subsequent financial planning service.
This will compensate the financial planner for their time to understand their client, crunch the numbers and delivery a financial plan; instead of trying their best to sell a product or service that their client may not need.
(ii) Recurring fee
Besides the upfront fee, a fee-based financial planner also charges clients a recurring fee for advising the client on their assets. A recurring fee is typically based on a percentage of the client’s investment portfolio. For example, if the investment portfolio under advice is RM1,000,000, the financial planner will charge 1% annually for advising and managing the portfolio.
This allows the interest of fee-based financial planners to be align with their client’s interest. If the client’s investment portfolio grow, so will the recurring fee.
Pros: Because the fee-based structure is not tied to selling products, it can be easier to keep the interest of your clients. Clients can be more trusting of their advisor as there is no upfront sale.
Cons: When offering financial planning advice, fee-based financial planners will need to spend time explaining the fees to clients. This can be difficult if the client is not familiar with the concept of fees.
A salary-based financial planner earns a salary from their employer, typically a bank or a fund-management company. This is not the most commonly seen structure in Malaysia as salary is a fixed cost to the financial institutions.
Unlike the first 2 financial planner salary structures, salary-based financial planners’ income is not a business income. It provides the financial planner a sense of stability, however, limits the potential income that a financial planner may earn as a commission-based financial planner or a fee-based financial planner.
Moreover, since the financial planner is employed by a bank or fund-management company, it is difficult for the financial planner to be independent and unbiased. They may tend to recommend products and services offered by their company, thus, may not be the best solution for their clients.
Pros: The salary-based structure is the least “risky” structure as it allows financial planners to make a stable income from their work.
Cons: A salary-based financial planner may not be able to earn as much as a commission-based or fee-based financial planner. It is also not easy to apply for a fee-based financial planner as the supply of this position is very limited in Malaysia.
PlanNERD’s Personal Take
When it comes to financial planner salary structures, the fee-based financial planner should be the best structure as it takes into account both financial planner and client’s interest.
For the financial planner, he or she do not need to offer free advice as their time is compensated with the upfront fee. Instead of over-selling what the client do not need, the financial planner will recommend products that is suitable for the client.
For the client, the fee-based structure will motivate the financial planner to maximise the return for the client as the financial planner’s recurring fee is based on the value of the client’s investment portfolio.
Moreover, with the introduction of technology and FinTech companies allowing clients to purchase financial products online, the commission-based salary structure may be badly affected in the coming years.
How to become a financial planner in Malaysia
If you are interested to become a financial planner in Malaysia, I have written a detailed article regarding this topic. Share with me your thoughts in the comment section below.