The Difference Between Fee-Based vs Commission Based Financial Planning

northwood-man-sitting-at-deskAt present, the majority of financial planners in the greater financial planning industry work on a commission-based system. Here, the financial planner works their personal fee into the total cost of the policies and packages to which he or she sells their clients.


Although a typical industry standard, a financial planner working in accordance with a commission-based system faces two challenges:

  1. They will only be able to earn an income based on whether they are able to sell a product. Thus, without a sale to a client, they have no income. Furthermore, the costs of policies are relative, thus, the higher the price of the premium, the greater the amount of income they generate through their commission, as released by the insurer.
  2. As the insurer typically wields a lot of power of the staff that they employ, certain outcomes can be influenced and affected. As these financial advisors are paid a sum of their commission upfront, they are forced to consider their personal cash flow when dealing with their client’s portfolios. The same applies to independent financial advisors.

Working on a different system, a fee-based financial planner will negotiate a fee for services rendered with their client before any business dealings commence. Here, the set fee of the financial planner is paid from the client, regardless of whether the client purchases insurance products or not. In a scenario where additional insurance products are sold, the fee-based financial planner will not receive any additional fee. As there is no incentive for the fee-based financial planner to up-sell or oversell insurance products, the client can rest assured in the fact that they will receive trustworthy advice for the government of their finance portfolios, and that this advice is genuinely acting in the client’s best interests.

In dealing with commission-based financial planners, a potential conflict could arise:

As the agent is incentivised to up-sell, the client is not always aware as to whether the proposed premium is in fact the lowest for the particular insurance product. Furthermore, the client will generally be unaware as to whether the suggested plans, or possibly changes in portfolios, are indeed put forward in their best interest.

Northwood Financial Services cc works on a fee-based system. One of the core reasons as to why we moved away from a commission-based system is due to the fact that in some cases, the insurer does not have the best product, and in fact, the best product may fall outside of the Financial Services Industry.

For example, a private property is guaranteed to grow with far better returns than an insurance product, and the resulting income can keep pace with insurance. With this, we; fee-based financial planners; are able to guide our clients toward the most lucrative portfolio selection for their needs and requirements, whereas a commission-based agent would have no incentive for advising in this manner.

In taking this approach toward your investments, a fee-based financial planner would have a more holistic view of your investments, and will advise your decision-making process for your benefit, not their own.

At Northwood Financial Services cc, our benchmark is the value of your entire estate and the protecting of your lifestyle should catastrophe strike. Due to the diversity within our portfolios of assets, our clients experience growth in wealth – even when the JSE falls.

If you are interested in beginning your journey toward financial freedom with a fee-based financial planner, contact Northwood Financial Services cc and talk to one of our consultants.

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