How Financial Advisors Get Paid — An Insider's Perspective

Financial advisors offer professional advice in much the same way as a lawyer, accountant or other consultant. However, financial advisor pay can be more complicated than in other professions, and a lack of clarity is often a stumbling block early in an advisory relationship.

In this article I lay out the different ways a financial advisor can be compensated for advice, some pros and cons of each, and factors you may want to consider when choosing how you will pay your advisor.

I give financial advice and get paid for it, so there’s some inherent conflict of interest here. Toward the end I’ll describe my own business model and how I arrived at it. Whether you are considering hiring me or any other advisor, I hope this inside perspective will be useful to you.

Three Ways to Pay

As with any rule, there are exceptions, but there are basically three ways a financial advisor can be compensated: commission, a percentage of assets, or an hourly rate. (A few other models exist too, such as a retainer fee or a flat monthly subscription, but these are less common.) Let’s discuss each of them in turn.

Option 1: Commission

An advisor paid by commission can also be called a broker, or a registered representative of a broker-dealer firm. They earn a sales charge when their client buys a financial product. This is either deducted from the initial investment (for example, on A-share mutual funds) or baked into the ongoing expenses (most variable annuities, and C-share mutual funds).

There can also be a recurring commission (a “trail,” or 12b-1 fee) that is paid over time, so the advisor can earn some ongoing revenue without moving their clients from one investment to another. This trail is included in the expenses of the financial product and paid for indirectly by the client.

Broker-advisors often get a bad rap, but there are some advantages to consider.

A one-time sales charge may be the lowest-cost way to pay for advice if you buy only once and then hold forever.

Further, if you’ve paid a commission up front but need to switch brokers, the process is relatively simple: you can usually change the brokerage firm or registered representative on your account with minimal paperwork. In a best-case scenario, your new broker picks up where the last one left off, is compensated by the ongoing trails, and (assuming they never tell you to switch to something else) you’ll have paid a sales charge only once for years of ongoing service.

In spite of this, there are still disadvantages to the commission-based model.

When investing, the best advice is often to stay the course. Advisors paid for moving money between products may cause clients to switch paths too often, when doing nothing at all would have been wiser.

Commissioned brokers also face odd incentives regarding financial products, because some of the historically strongest investments out there, passive index funds or ETFs, are mostly not available with sales charges.

An index fund with an up-front sales charge, plus a higher expense ratio to pay the advisor a recurring trail, is by definition a worse product than the same index fund without those costs. They’re both just tracking an index, after all.

To avoid recommending obviously worse investments, broker-advisors are often shoehorned into the role of sales agents for actively managed mutual funds, which claim they can beat the index. On average, these funds underperform their benchmark indexes after fees, but steering clients toward them may be the main way a broker-advisor is paid.

Since June 2020, the SEC’s Regulation Best Interest (“Reg BI”) has required brokers to act in a customer’s best interest when they make a recommendation, and not to put their own pay ahead of the client’s. That’s a real step up from the old “suitability” standard, but it applies at the moment of the recommendation, which stops short of the ongoing fiduciary duty an investment adviser owes clients.

Aside: “Dual-Registered” Advisors

At many large financial firms, advisors are “dual-registered.”

A dual-registered advisor is both a broker who can earn commissions and an Investment Adviser Representative, able to charge fees for giving financial advice.

A dual-registered advisor has access to the widest range of products and services and, in theory, uses this wide selection to best advance their clients’ interests.

In practice, this can become confusing. For example, if you paid a commission to buy some mutual fund shares a few years ago and the advisor now recommends you move to an advisory account that charges a fee for advice, have your needs and circumstances changed, or is the advisor just motivated to pull more revenue from your account?

Compliance departments are on the lookout for problematic behavior, but there are large gray areas to navigate, and these come down to the diligence and ethical standards of the individual advisor. Multiple methods of compensation are often not very transparent from the client’s perspective.

The old-fashioned stockbroker who survived on commissions alone is basically a dinosaur today, and dual-registered advisors are the most common. When working with a dual-registered advisor, clients should be sure to understand exactly when their advisor is offering advice as a fiduciary, and when they are not.

Option 2: Percentage of Assets

Also referred to as a fee on assets under management (“AUM”), this model bills based on the amount of money the advisor oversees. This is often just called an advisory account.

AUM fees are usually split up and billed quarterly, so a 1% annual fee becomes 0.25% every three months. An advisor managing $100,000 for a 1% fee would bill $250 each quarter, deducted directly from the account being managed.

The AUM model has grown rapidly in popularity, and there are good reasons why. This compensation model ties advisor pay to the desired outcome, a larger account balance, and reduces the temptation to move funds around unnecessarily.

Advisors billing on assets managed obviously want that pool of money to grow, both through good performance and by keeping clients happy for the long term. If accounts underperform or clients leave unsatisfied, it’s felt directly on the bottom line. Having some “skin in the game” can certainly help focus the mind!

When working with a dual-registered advisor under an AUM model, sales commissions are typically (but not always) waived when buying funds in the advisory account. This varies by firm. Funds that pay a trailing commission (12b-1 fee) in an advisory account might pay that trail to the dual-registered advisor or to the brokerage firm, or refund it to the client. Again, it depends.

One issue to be aware of is that an advisory account is typically held at the advisor’s chosen custodian, so that the advisor can buy and sell on the client’s behalf. Clients who have their funds at a self-service brokerage may be asked to move custody of their account in order to receive advice.

Some big names in the custodial space are Charles Schwab, Fidelity, Pershing and Altruist (my own custodian). Advisory custodians are tightly regulated and audited, but clients should do enough research to feel comfortable that they’ll receive prompt service on contributions or distributions from the advisory account.

Aside: “Fee-Based” vs. “Fee-Only”

You may see these terms in advisor marketing materials.

A “fee-only” advisor is paid only through asset management fees or directly for their time and advice, never through product commissions. The term is intended to distinguish advisors who are always expected to act as fiduciaries from dual-registered advisors, who may be in a fiduciary role only part of the time.

So what is a “fee-based” advisor? This almost always means an advisor who is dual-registered, or who perhaps also works as an insurance agent, in addition to providing advice for fees.

The terminology is often used imprecisely, but the distinction emerged from guidelines set by the Certified Financial Planner Board of Standards. The CFP® certification is administered by the CFP Board, a private professional standards body (not a government regulator), which certifies advisors after they meet education, examination, experience and ethics requirements. CFP® professionals are expected to act as fiduciaries regardless of their compensation method.

An advisor who describes their practice as “fee-based” and holds the CFP® certification may be able to offer the widest selection of financial services and compensation models while acting under a fiduciary standard at all times. But these multiple compensation models can quickly get complicated and confusing to explain, and there will still be conflicts of interest that have to be carefully disclosed to a client.

Option 3: Hourly Rate

Finally, clients can pay for advice on an hourly basis. The advisor might give an estimate of how long a planning engagement will take or, alternatively, charge a standardized flat fee for a planning project based on their hourly rate.

The biggest advantage of the hourly model is that it detaches the planning process from the financial product. In other words, if the advisor has no expectation that you will ask them to implement the plan, they can simply tell you what to do, and you select the financial products to purchase yourself.

In some corners of the financial web, the most common advice is to hire an advisor only for their time. To me, it sometimes sounds like a doctor’s checkup or a dentist appointment: go in, sit for an hour, receive a clean bill of health (or maybe some instructions on how to brush better), and go on your way.

Paying your financial advisor the same way as your lawyer, accountant, or any other hourly professional has some intuitive advantages, but there are downsides as well.

For one, just as with a doctor’s visit, receiving the diagnosis and advice is only the first step. Recommendations still have to be implemented, and then monitored to check for progress. A client who wants to avoid ongoing fees may balk at the idea of paying for recurring advice to see that the plan is executed properly.

Implementing a long-term financial plan is a bit like running a marathon. The advice can be simple (“just keep running”), but actually going the distance is hard. A plan may show the route, but it won’t coach you through the steps or offer a hand if you stumble.

Consider this scenario: the markets are in decline, and you’ve been watching your investment account go further and further into the red for weeks. Everyone is saying “the worst is yet to come!” and the news anchors are predicting new lows every day.

In that moment, stinging from lost money, are you going to be in the mood to call up your hourly-rate advisor and pay hundreds of dollars for their thoughts? Maybe not, but that is exactly when your advisor might bring the most value, telling you whether to cut losses or stay the course.

One danger of the hourly model is that it commoditizes the professional relationship. The people I’ve talked to who got really good value from their advisor usually mention the personal connection as part of why it worked, and getting an invoice at the end of each conversation can make that harder to achieve.

Conclusion

There’s no single best way to pay for financial advice, and some excellent advisors use every sort of compensation method out there. That said, how you pay for a service can influence the way it’s delivered, and each method has its pros and cons.

In my own journey through the financial services industry, I started as a dual-registered advisor. I could offer clients a choice between paying for my advice through a sales commission if they took my recommendations, or through an ongoing fee for asset management and planning. I thought that a wider range of choices could only be a benefit.

Over time, I found the commission-based side of the business more and more dissatisfying. After paying a commission, a financial product feels “locked in.” Clients do not want to pay twice, so any recommendation to change comes across as suspect, even if the change might be a good idea. This payment model created tension and conflict.

Opening my independent practice led me to rethink how I could create the most value for the families I serve.

Personally, I love the intellectual challenge of investing, and I’m in this business to talk with people about how to build and preserve assets. Focusing on the best way to provide investment advice made both personal and business sense, so I cut out the parts that didn’t serve that goal. Commissions interfered with finding the best investments, so dropping that side of the business made perfect sense to me.

Most of my clients hire me under an assets-under-management model. I find it the most transparent, and it allows me to do my best work without distraction. It’s a good fit for people who want their assets handled professionally but are too busy to do it all themselves.

I also work with clients who want help with some aspects of planning but enjoy picking their own investments, and for them I offer an hourly fee model instead.

The financial industry still suffers from a transparency problem, and part of that comes from how complicated it is to pay for advice. There are plenty of honest, hard-working and knowledgeable advisors out there. Just be sure that when you hire one, you understand how you’re paying and what services to expect in return.

Important Information

Bormann Wealth Management, LLC is an investment adviser registered with the State of Washington. Registration does not imply a certain level of skill or training. This article is for general educational purposes and reflects the author’s views as of October 2026. It is not a recommendation, a solicitation, or personalized investment, tax or legal advice, and no advisory relationship is formed until both parties sign a written agreement.

Fees and conflicts of interest: The author is the firm’s principal and is compensated through the fee models described above, which is a conflict of interest when discussing them. No single fee structure is appropriate for every investor; the right fit depends on each client’s circumstances and the services needed. The firm’s current fees, services and conflicts of interest are described in its Form ADV Part 2A, available on the Disclosures page.

Investment risk: All investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.