How Do Financial Advisors Make Money?

Working with a financial advisor can be a great idea if you need help managing your investments or creating a financial plan for the future. But before you work with a financial advisor, it’s important to understand how they make their money. Not only should you know how much you’ll pay in fees, but you’ll also want to understand how other forms of payments could incentivize them to make certain recommendations. If you have questions about specific advisory fees, consider speaking with a financial advisor.

How Do Financial Advisors Get Paid?

All financial advisor firms have their own unique payment structures. In other words, there’s no one-size-fits-all approach that firms take. However, generally speaking, there are three main ways financial advisors make money:

1. Client fees: These are usually on an hourly basis, fixed basis or as a percentage of each client’s assets under management.
2. Commissions: These apply to certain financial transactions, such as the commissionable sale of insurance products or the buying and selling of specific securities.
3. Salaries: Many on-staff advisors earn income in this traditional manner.

Within these advisory firms, which are registered with the SEC or a state-level authority, are typically individual fiduciary financial advisors. Here’s a more detailed breakdown of each of the above fee types that these advisors and their firms may earn:

Client Fees 

Many financial advisors and firms will earn fees directly from their clients. A management fee for investment management services is frequently a percentage of the assets they’re managing on your behalf. So if a financial advisor is managing $1 million worth of investments for you, and they charge a 1.5% management fee, you’d pay $15,000 on the year. Often, advisors divide these fees on a quarterly or monthly basis.

Fee percentages might differ depending on how much you have invested with an advisor, with many firms lowering their percentage for larger account balances. Some advisors also include performance fees in their fee schedules, allowing them to charge additional fees to clients in exchange for exceeding certain return benchmarks.

An advisor might also charge a flat or hourly fee, usually for financial planning or one-time consulting services. For instance, a firm may charge $250 an hour for financial planning, or a flat fee of $1,000 for a consultation. Alternatively, an advisor might charge a flat fee for a specific project, such as an estate plan.

Commissions

In this type of fee arrangement, a financial advisor makes their money from commissions. Advisors earn these fees when they recommend and sell specific financial products, such as mutual funds or annuities, to a client. These are often payable in addition to the above client fees.

For example, you might invest $5,000 into a mutual fund your advisor recommends. In turn, they receive a 3% commission fee, earning them $150. Similar commission may come their way if they sell an annuity or life insurance policy to a client.

Salaries

Some advisors receive a salary from the investment firm that employs them, rather than earning commissions or charging fees. These advisors may also have opportunities to earn bonuses or incentives for meeting certain milestones, such as onboarding a certain number of new clients each year.

Financial Advisor Fee Structures: Fee-Only vs. Fee-Based

A firm’s sources of income determine whether they are considered a fee-only or fee-based advisory. Here’s a brief breakdown of each:

• Fee-only financial advisors: These advisors don’t charge commissions. Instead, their sole source of income is client fees for the services they provide. Again, this potentially includes both percentage-based management fees and flat or hourly financial planning fees.
• Fee-based financial advisors: By contrast, these advisors earn revenue from a combination of client fees and commissions. They charge fees to you directly for managing your assets or providing financial planning, while also earning some commissions on the side. These commissions are usually in relation to securities or insurance sales.

Commissions represent a potential conflict of interest. In short, they incentivize your advisor to recommend certain transactions and products. And you want to make sure your needs inform the advice you receive, meaning their potential commissions don’t factor into things. With this in mind, some experts recommend only using a fee-only advisor.

One important thing to note when comparing fee-only and fee-based advisors have to do with whether or not your advisor is held to a fiduciary standard. A fiduciary is held to a higher ethical standard and is required to act in her best interests at all times. Any registered investment advisor (RIA) holds this standard as part of their registration with the SEC. This standard might be a mitigating factor when considering a fee-based advisor; while such an advisor has the incentive to recommend certain transactions, those transactions must still be in your best interests.

There are five main ways that registered investment advisors charge for their investment advisory services. The table below breaks them down:

Types of Financial Advisor Fee Structures

How Much Do Financial Advisors Make Off Your Money?

Again, there’s no set answer to this question since financial advisors can assess their fees differently. According to a 2021 Advisory HQ study, on average, you can expect to pay between 0.59% and 1.18% for an advisor who charges asset-based fees. An advisor who charges by the hour, on the other hand, might fall into the $120 to $300 range. For advisors who charge a flat fee, the cost may range from $7,500 to $55,000. All of these ranges vary based on what your asset level is.

A good way to keep the fees in perspective is to consider what you’re getting in return. Say you come across an advisor that’s fee-based. They charge both commissions and fees, with a high 3% management fee for their services. Now, if that advisor is able to help you realize a 12% or 15% net gain in your portfolio year over year, then that 3% fee may well be worth it. On the other hand, you might be more comfortable with a fee-only advisor if it’s important to you that you’re receiving a completely unbiased opinion.

How to Compare Financial Advisor Costs

If you’re looking for an advisor to work with, there are a few ways you can research their fees. The first is to check their Form ADV filing if they register as an investment advisor with the U.S. Securities and Exchange Commission. This form is a public disclosure that outlines how the advisor makes money and what fees they charge. It also has tons of information about their services, disclosures and more.

You can also review an advisor’s fee schedule online if they advertise their fees. And if they don’t, the next step is to ask them directly. Ideally, you want to work with an advisor who’s transparent about how their fees are calculated and what you’ll pay. Keep an eye out for advisors who dodge questions about fees or seem reluctant to share how they make money. That’s a sign that you may want to look elsewhere for financial planning help.

What Is the Success Rate of Financial Advisors?

There are two ways for a financial advisor to be considered successful. First, they can provide successful oversight of their client’s assets and help them reach their goals. There is no accurate enough data to suggest what percentage of clients receive what they were looking for when they hired their financial advisor.

Second, financial advisor is considered successful if they’re able to build and maintain their firm over time. A large percentage of firms, as high as 80-90%, close shop within the first five years of opening. This would put financial advisory firms at a 10-20% success rate under those terms.

What Is the Average Return From a Financial Advisor?

The average return you receive when working with a financial advisor is likely going to be a major factor in determining whether the fees are worth it. If a specific advisor has a history of providing a higher average return than another advisor that costs the same to you, then it seems like a no-brainer on which to choose.

The average return is going to vary from year to year, based on the activity in the market. Studies have shown that financial advisors have the potential to add, on average, between 1.5% and 4% to your portfolio above what the average person is able to get as a return on their own. While you may want more of a return than an advisor can provide, it’s important to understand the restrictions in the market and compare their returns to what you could do without them.

Potential Red Flags When Hiring a Financial Advisor

Costs aren’t the only thing that could cause the alarms to go off in your head when you’re looking for the right financial advisor to work with. While financial advisors can offer you the services you’re looking for, some may not be what you need. Here are a few red flags to look out for during the interview process:

1. Fee-based Advisors: This doesn’t have to be a dealbreaker but it can be a red flag if fee-based advisors that are getting paid in commissions on products don’t disclose exactly how they make money.
2. Disclosures: A big red flag could be if the advisor has a disclosure on their Form ADV. It’s important to know what the disclosure says and make sure the advisor wasn’t involved with any criminal or concerning activity.
3. They Are Unresponsive: If it is difficult to get an advisor to respond to you before you’ve hired them, that could be a red flag that they aren’t going to respond to you much once they are getting paid.
4. Pushing Short-Term Returns: This might be what you’re looking for but if it’s not then it’s a red flag that an advisor is pushing something that isn’t a match for your goals.
5. They Brag About Beating the Market: This is the sign of an advisor that can either be difficult to work with or someone who actually doesn’t fully understand the market. If an advisor is providing strong returns then those returns can speak for them when it comes to showing you proof of their work.

Bottom Line

Financial advisors can make money in a number of ways. What’s important as an investor is to find the one whose fee structure aligns with your needs and budget. As you’re reviewing fee schedules, be sure to ask about any fees you don’t understand. If you’re working with a fee-based advisor, it’s also helpful to ensure that they’re held to a fiduciary standard; you might also ask how they determine which investment products to recommend. Doing your research on advisor fees beforehand can help you understand both what you’re paying and the incentives your advisor has.

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Before working with a financial advisor, ask what kind of investment strategies they typically use. Ideally, the advisor you choose should have at least some experience in dealing with the kind of challenges or issues you have when it comes to your finances. It’s also a good idea to check an advisor’s professional certifications to learn which areas they have expertise in.

Next Steps

Do you want to learn more about financial advisors? Check out these articles:

• How to Choose a Financial Advisor?
• What Commissions Do Financial Advisors Earn?
• How Much Does a Financial Advisor Cost?
• Are Financial Advisor Fees Tax Deductible?
• Are Financial Advisors Worth it?

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