How do financial advisors make money?

Managing your assets and carefully planning your financial future can get difficult at times, which is where professional help can come into play. Financial advisors can help guide you to meet your financial goals and build your wealth.

However, while financial advisors can help you get your finances in order, it’s not without a cost. It is important to do your research when choosing a financial advisor, including how much you will be paying. But how does a financial advisor make money, exactly? 

Financial advisors, also known as investment advisors or wealth managers, earn their pay in many different ways. In general, there are three main ways financial advisors make money: commissions, client fees, and salaries. 

Every advisor’s fee structure can vary based on the types of services and products they offer, along with what model they use to run their business. Therefore, it is important to understand how they earn their money to see if it aligns with your values, to ensure their price is within your budget, and so you won’t be surprised by potential hidden fees.

Commission-based payments, as implied by the name, are when financial advisors receive paid commissions when they recommend and sell specific financial products to their clients. It is one of the most common ways for financial advisors to make money.

Financial advisors can charge commissions on transactions, trades, or purchasing specific financial products such as mutual funds, insurance policies, or annuities. When you buy one of these products, or any other product they are selling, they earn a part of the profit from you. It is also important to note that some financial advisors can earn commissions on top of client fees too.

You might also want to determine if there are any potential conflicts of interest to avoid possible biases. This can ensure your investments are working in your best interest. 

It is important to consider how financial advisors make their money when choosing one, more so when they are commission-based, to help you choose the right advisor to meet your goals.

Financial advisors and firms can also earn money through client fees. In this case, client fees are earned depending on the amount of money advisors are managing for their client, also known as assets under management (AUM). For example, if a financial advisor is managing a $1 million portfolio for you, and they charge a 1% AUM fee, you would owe $10,000 in annual fees, which are often divided on a quarterly or monthly basis.

AUM fees can vary depending on how much money you have under management, but many advisors set lower fees for larger balances, known as a tiered fee structure. Some advisors also charge extra performance fees on top of AUM fees if they exceed certain benchmarks.

Financial advisors can also charge hourly rates or flat fees for their services. This can be more beneficial for smaller clients who don’t have a high balance to manage.

Some financial advisors earn their money through salaries from their employer rather than by commission or client fees. While they don’t have the incentive to sell products to clients for a share of their own, they can still earn bonuses through achieving milestones, such as taking on a certain number of new clients per year. 

Working with a salary-earning financial advisor can also help avoid conflicts of interest, since they are not necessarily focused on selling a certain product. However, you might still want to check if they are also a fiduciary, a financial professional legally obliged to work in the best interest of their clients, to ensure they will be making decisions to best meet your goals. 

Since every advisor or firm has unique pricing structures, it could be wise to do some background research to know what to expect.

When asking yourself, ‘How do financial advisors make their money?’, there is more to the equation than simply just client fees, commissions, and salaries. Since there are various ways financial advisors can get paid, it is also important to understand the difference between fee-based and fee-only compensation models, so you know what you are paying for and how the transactions are being made.

• Fee-based financial advisors get compensated through a combination of commission and client fees. As a client, you would be directly paying for asset management or financial planning, but your advisor can also earn commissions from certain products they have sold you. 

• Fee-only financial advisors, on the other hand, earn their income solely through client fees and the services they provide (essentially through client fees or salaries). These charges can include percentage-based management fees (like AUM fees) or flat-rate and hourly fees, depending on their pricing models. Working with fee-only advisors can also help you avoid potential conflicts of interest associated with commission-based sales.

Since fee structures can overlap, it is important to understand the payment model of your potential advisor when planning your financial future and investment strategy. It is also crucial to note that how financial advisors make money is unrelated to whether or not they are fiduciaries.

When deciding on a financial advisor, the payment system you should choose depends on your budget, comfort level, and what makes sense for you. Since everyone has their own unique financial situation, there is no specific payment system that is the "best."

ou might also want to consider if your potential advisor is in alignment with your values, if they have any biases or possible conflicts of interest, and you might also want to try to better understand their incentives. After all, they will be helping you manage your money, so you want to ensure you trust the person and how your money will be spent.

Understanding how financial advisors get paid is one step in finding a financial advisor. Our detailed guide on how to choose a financial advisor can help you make a checklist of other things to consider from establishing your financial goals, understanding pricing systems, and starting your partnership with an advisor. 

While searching for the right financial advisor may take some time, you might want to consider doing some background research to help you find the right person who will help you reach your goals and also aligns with your values. It is also crucial to understand their payment structure before you decide to start working together. 

Here are some questions you can ask your potential advisor to help you better understand their fees: 

• How are you compensated? Do you earn money from fees, commissions, or both?

• Are you a fee-only, fee-based, or commission-based advisor?

• If you earn commissions for recommending specific financial products, how do you avoid potential conflicts of interest?

• What is your standard fee structure, do you charge a percentage of assets under management, a flat fee, an hourly fee, or a subscription? 

• Can you provide a breakdown of all potential costs I might incur? Are there any hidden costs I should know about? 

• Will I receive a written fee schedule or client agreement outlining all costs? 

• How often will I be billed and what payment methods do you accept?

Such questions can help you better ensure you’re hiring someone transparent and trustworthy, and that you will understand what you’re paying for. You can also take a printed or digital list of questions to reference when meeting a potential advisor.

Understanding how financial advisors make money is crucial when searching for a financial advisor. Payments based on commission, client fees, salary, or a combination of fees can help you determine if a potential advisor will fit your budget or if they align with your values. You might want to ask questions about their fee structure before deciding to work together to avoid any possible misunderstandings.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.