Financial planning compensation is perceived to be a bit mysterious. Fee based, fee only, commission, project based; what does it all mean? It is important to understand how your financial planner is compensated, not just for the obvious financial reasons, but also for peace of mind.

Commission-based and fee-based financial planners are planners who are compensated by the products they sell. In this case, the planner offers financial planning to add value to the services they provide in addition to selling financial products. These planners may sell all types of financial products or may limit themselves to mutual funds or insurance products. The commission-based planners are paid a commission based on the sale of a specific product. Fee-based planners are paid a percentage based on assets under management.

The distinction between fee-based and fee-only planners is determined by who actually pays the financial planner. Either way, the fees are coming from the client. However, the fee-based planner is paid by the companies of the products they sell and a fee only planner is paid directly by the client. It is important to note that both types of planners provide the service of asset management.

Project-based planning is a completely different type of approach to financial planning. These planners are paid directly by the client based on an hourly or per project rate. This type of planner does not sell any financial products. Another important distinction is that they do not manage investments. The projects offered are along the lines of education, retirement, cash flow and estate planning. Generalized investment advice about asset allocation is often an option as well.