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How Do Financial Advisors Get Paid & Which Fee Structure Makes The Most Sense

The most common question when deciding to go with a financial advisor is, “how much do they cost?” You will definitely want to ask your financial advisor this question before hiring them, ensuring you will have transparency into how their fees will work with your investments. 

It is important to understand the different ways a financial advisor can be paid so that you are prepared to choose the right advisor for you. The compensation model that the firm or individual uses may impact the advisor you choose. 

How Financial Advisors Are Compensated

Depending on the financial advisor or firm you are working with, there could be different pay structures that they could implement. Fee types can range from hourly charges, subscription fees, fixed fees, commission-based fees or performance-based fees. Let’s break down how each fee structure works.    

Client Fees

A common way for advisors to charge clients are traditional client fees. The most common forms are hourly charges, AUM fees, per plan fees, and simple retainers.

Hourly Charges

Financial advisors can charge an hourly rate as opposed to more of the transaction or performance-based fees. These types of advisors don’t typically work with a firm and the fee is separate from your actual investments, meaning that you are paying for their advice and recommendations. 

An hourly rate would be in the arena of $150 to $400 per hour, depending on their level of experience. It is important to note that fee-only advisors work as fiduciary advisors, so they have your best interest at the forefront of their mind. 

When This Would Make Sense:

  • When you have a net worth that is very large and you don’t want fees that scale with your investments
  • You only need direction for certain investments but not assistance in making complicated transactions or choices

When This Would Not Make Sense:

  • When your net worth is low, you find yourself spending more on fees than what could potentially be gained from investments

Assets Under Management (AUM) Fees

Financial advisors that are performance-based charge fees if a certain benchmark or growth percentage is hit, as determined when you sign the contract.

This could potentially put your investments in a riskier position than you feel comfortable with. It makes sense that if they want to make money, it is in their best interest to create an investment strategy that could yield the highest returns. 

If they do not hit that certain benchmark or if the growth percentage isn’t hit, then they may not get the performance-based fee. This could cause an alignment issue with your investment goals if you want to be on the less risky side in your portfolio. But if you are ok with investing that will allow for maximum growth, this could be a good fee option.

When This Would Make Sense:

  • It incentivizes the advisor to make you the most money, because they make more money if you do as well

When This Would Not Make Sense:

  • Encourages risky investment strategies — may not align with you if you prefer a conservative investment strategy 

Per Plan Fees

An advisor could provide a list of services for a set or fixed cost, and you choose which services you wish to enlist. You may spend around $1,000 to $3,000 to get a detailed analysis of your retirement goals and their plans to get there. Similar to hourly fees, this type of advising isn’t coupled to your investments, it’s a set fee per plan.  

When This Would Make Sense:

  • When you are just getting started and want quality advice, but you do not need someone to manage a large portfolio

When This Would Not Make Sense:

  • When you require recurring or consistent assistance from a financial expert  

Retainer Fees

Retainer fees are charged fees for ongoing services provided. A retainer fee is a structure that allows you to have more structured interactions, meetings and/or service commitments with the advisor.  

With a retainer, you may have unlimited access to a certified financial planner (or CFP), as well as access to a detailed personal financial plan. Some institutions have a flat up front fee and a monthly retainer fee. Some other value-adds besides financial planning and advice can include market newsletters, portfolio management software, and more.

When This Would Make Sense:

  • This model would make sense to someone who doesn’t yet have a lot of assets, but wants ongoing sound advice
  • Someone who wants to know exactly how much they are paying for advice and planning — rather than having a percentage of earnings as a fee

When This Would Not Make Sense:

  • You want actively managed investments, as opposed to only professional advice and planning 

Commission-based Fees

Financial advisors that work off of commission-based fees typically suggest a particular fund, or other investment, to their clients and charge a percentage of that deal. The fees run a certain percentage of the transactions associated with insurance products, mutual funds or annuities for the client. 

For example, you have $10,000 of capital — if the advisor suggests investing in the “XYZ” fund and makes a 5% commission, then the fee for that transaction is $500. This transaction fee type structure creates incentive for the commission based advisor to make investments that may not make sense to the client. 

When This Would Make Sense: 

  • If you prefer to pay one time fees don’t plan to move assets to other funds often
  • If you can confirm that this type of an advisor is a fiduciary (working in your best interest) and making sound decisions and recommendations

When This Would Not Make Sense:

  • If this type of an advisor is not a fiduciary advisor (would not have to disclose conflicts of interest, and could be working primarily in their best interests)
  • If you have large sums of money to invest — example, if you have $500,000 capital and the advisor is working off of a 5% commission fee — the charge comes out to $25,000!


Some advisors receive a salary from their employer, as opposed to charging fees or commission based. These advisors have other incentives to get bonuses, such as signing up a set amount of new clients on an annual basis or reaching particular set milestones. 

Choosing Which Fee Structure Makes The Most Sense For You

An investor should evaluate a financial advisors’ fee structure in order to see all of your options. Depending on your scenario, different fees can result in more or less money that you would need to spend, potentially for the same results. 

Consider Your Investment Goals/Strategies

Your investment goals could alter which fees would make the most sense for you. Choosing an advisor with fees that align to aggressive or conservative strategies is an important distinction to make. If you are starting out and don’t have a plethora of assets, someone who works at an hourly rate, or a low flat fee would be best for you.  

Initial Investment Considerations 

One of the biggest factors for your investments is probably the amount of money that you are willing to invest. If you are at a lower amount, you may be less inclined to work with an hourly fee structure. Conversely, if you have a larger amount of money, you may be more likely to pay that fixed fee.

For instance:

  • If you are investing less than 10k, then a $500 per plan fee likely doesn’t make sense as this is 5% of your total investment
  • If you are investing $100,000, then that same $500 per plan fee would probably make more sense as this is only 0.5% of your total investment  

5 Fee Structure Questions To Ask Your Financial Advisor

You may not understand fee structures entirely, it is probably best to ask an advisor directly. This way you are on the same page as your advisor and realize what you could potentially be paying. These are the 5 questions you should ask your financial advisor:

Do You Have Multiple Fee Structure Options?

Are there multiple fee structures that I should be aware of? Can you itemize your fees and explain how they will be accrued if there are multiple structures?  

Will I Be Notified Of All Fees?

Will I receive a bill or an invoice? Will all of the fees be transparent in my statement? 

Can I Change How Fees Are Applied Later On?

Is it possible to change the fee structure after a certain point? Can I switch from fee-based to fee-only, etc.?

What If My Portfolio Loses Money?

Will I still owe money if my portfolio loses money? If there are no gains on my investments, will I be assessed a fee regardless?

Are There Any Cancellation Fees?

If I decide to go with another brokerage and cancel my account with you, are there any fees associated with this transaction?

Which Fee Structure Is Right For Me?

It is important to know the difference between all of the fee structures that accompany financial advisors. Some may be better for you depending on your current financial situation. You should assess the pros and cons of each method, and determine which one makes sense with your financial goals.