How does a financial advisor get paid?

Summary 

Why do people use financial advisors? 

A financial advisor uses their knowledge and experience to create bespoke financial plans to help clients achieve their financial goals.  

In 2023, 57% of Americans sought financial advice. Of those people, 35% turned to financial advisors or other professionals for assistance and guidance.  

Advisors offer a range of services, such as financial planning and management, to help clients achieve their financial goals.

As can be expected, their services don’t come for free. However, how a financial advisor gets paid may differ depending on numerous factors.  

How does a financial advisor get paid? 

The fee structure for financial advisors depends on the advisor or the firm they work for.

Let’s take a closer look: 

Some financial advisors charge fees.  

For example, an advisor might charge a management fee for investment management services. This fee is usually a percentage of the assets they manage for you.  

Let’s say your advisor charges a 1.5% management fee. If they manage investments worth $1 million on your behalf, you will pay $15,000 for the year, which may be divided monthly or quarterly.  

Fee-based financial advisors charge additional performance fees if their expertise results in your investments exceeding certain return benchmarks. Some advisors lower the percentage they charge for larger account balances.  

Many advisors charge an hourly or flat fee for one-time consulting services, specific projects, or financial planning services. 

Commissions are another common way in which financial advisors get paid.  

Many financial advisors’ commission structures are based on recommending and selling annuities, mutual funds, or other financial products.  

For example, let’s say that your advisor receives a 3% commission fee if you invest $5,000 into a mutual fund they recommend. The commission works out to $150. They will receive their commission in addition to any fees they charge you for the consultation. 

Salaries are a common method of how financial advisors get paid.  

With this method, the advisor receives a salary from the firm that employs them. They do not charge fees or earn commissions.  

Many firms offer incentives and bonuses to advisors who meet various milestones. For example, an advisor might receive a bonus for attracting a specific number of new clients in one year. 

Fee-only vs. fee-based: what does this mean? 

How financial advisors are paid at a firm is the deciding factor when it comes to whether the firm and its advisors are fee-only or fee-based.  

Let’s learn more about these two different types of fee structures. 

With a fee-only structure, a financial advisor or firm does not charge commissions.  

The client fees they charge for services they provide are their only source of income. These fees may include hourly or flat financial planning fees as well as percentage-based management fees. 

Fee-based financial advisors and firms earn income from a combination of fees and commissions. In addition to charging financial planning and management fees, they also earn commissions through insurance or securities sales. 

It’s important to remember that commissions might be an incentive for your advisor to recommend certain products or transactions rather than others. This could be a potential conflict of interest, as the advice you receive should be based on your needs rather than how much commission your advisor could earn.  

Some experts recommend using fee-only advisors for this reason. SEC-regulated advisors are an exception to this, as they are held to a fiduciary standard, meaning their advice and recommendations must be in your best interests.  

Unbiased only works with SEC-regulated financial advisors, meaning they only act in your best interest.  

How do you compare financial advisor costs? 

When it comes to choosing a financial advisor from among several, you should also compare costs and how financial advisors are paid – and there are a few ways to do this. 

One way is to check their Form ADV filing, which you can do if they register as an investment advisor with the U.S. Securities and Exchange Commission.

The form explains the advisor’s fees and how they make their money, and it includes other information such as disclosures and the services they offer. 

Another way is to review their fee schedule online, provided they detail their fees on their website.  

If you can’t find their fees online, ask them directly via the phone, email, or in person.  

How to find a financial advisor 

How financial advisors are paid can make a big difference to your experience with them.  

How much you pay for this advice will depend on the advisor you choose.

Let Unbiased take the hassle out of finding a financial advisor.  

We can match you with an SEC-regulated financial advisor who can help you learn more about finances and give you expert financial advice when you need it.  

Get matched today.