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How financial advisors make money

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When you’re hiring a financial advisor, it’s crucial to understand how that professional gets paid.

To consumers, it may seem like a simple question to ask — but the answer isn’t necessarily straightforward.

About 36% of consumers don’t know how they pay for a savings or investing relationship with a financial firm, according to a 2023 Hearts & Wallets survey. Another 20% said they think their financial service is free.

Many of those clients are likely mistaken, although some advisors and organizations do provide advice on a pro bono basis for underserved communities.

“Everybody gets paid one way or another,” said Kathryn Berkenpas, the managing director of corporate growth at the CFP Board, which oversees the certified financial planner designation.

More from Financial Advisor Playbook:

Here’s a look at other stories affecting the financial advisor business.

Advisor compensation falls into two main buckets: a “commission-based” or “fee-based” relationship.

The latter can have many sub-categories. For example, consumers may pay an annual dollar fee, a monthly subscription fee, a one-time sum for a single consultation, or an annual charge based on assets under management.

An advisor might use several of these models with one client, depending on the services provided.

There are pros and cons to each option, advisors said.

“It’s important to know what fee is charged, what services are included and what conflicts of interest there can be,” said Gloria Garcia Cisneros, a certified financial planner based in Los Angeles and member of CNBC’s Financial Advisor Council.

Here is a breakdown of popular compensation types.

Commissions

A commission is generally a one-time, upfront sum that a financial firm pays to an advisor for selling a specific financial product, such as an annuity or life insurance.

Commissions are on the decline. About 23% of advisors received commissions in 2024, a share expected to to 16% in 2026, according to Cerulli.

The pros:

Commissions may be the lowest-cost way for certain consumers to get advice about a specific financial product they need, said Lee Baker, a financial planner based in Atlanta and member of CNBC’s Financial Advisor Council. Consumers shouldn’t expect to have an ongoing relationship with the advisor after the sale, he said.

The cons:

Commissions may pose a conflict of interest in some cases, advisors said. For example, an advisor may be tempted to recommend a mediocre financial product that pays them a higher commission, rather than an optimal product that pays them less. The same is true outside of finance, when shopping for a car or a home, for example, said Cisneros, who is a wealth manager at LourdMurray. “You need to go in knowing your numbers, because you have no one batting for you on the other end,” she said.Consumers can face problems with commission-based products later if they’re not careful: For example, insurance and annuity contracts can be difficult and costly to get out of after purchase, depending on the terms, Cisneros said.

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Assets under management (AUM) fees

Asset-based fees are charged on a client’s assets under management.

Such fees are expressed as a percentage — commonly 1% — and charged annually. For example, an advisor managing $1 million for a client would collect $10,000 as a fee in a given year.

The client doesn’t cut a check for this sum; advisors withdraw the fee directly from their investment account.

Asset-based fees are the most common type of advisor compensation: About 72% of advisors received an AUM fee in 2024, a share expected to rise to about 78% in 2026, according to Cerulli.

The pros:

In some ways, the model is simple to understand: It’s a flat fee that really doesn’t change over time, offering a level of predictability. “It’s simple, and it aligns with the client’s intentions,” Cisneros said. “The goal is really to make your portfolio grow. There’s a mutual incentive you’re both sharing.”The model can be a good fit for clients who have a lot of money they want to invest, and want to receive ongoing investment advice or have their advisor manage it for them over a long period of time, experts said.

The cons:

While the fee doesn’t change from year to year in percentage terms, it does fluctuate in dollar terms based on the size of one’s portfolio. In years when the stock market soars, some people argue the advisor benefits financially even if they don’t add much value — portfolios would be expected to grow regardless, said Baker. Of course, in down years, the advisor could lose money, too, he said.The model may also exclude consumers who don’t have a lot of investable assets, because advisors might not find it profitable to take on such clients. “Lack of availability to the masses” is the big con of the AUM model, Cisneros said.AUM fees sometimes can “fly under the radar” for consumers because the fees are deducted behind the scenes from client accounts, said Berkenpas of the CFP Board.

Advisors that use an AUM model may only offer advice about investments, rather than comprehensive financial planning that includes other areas of focus, like budgeting, debt reduction, or insurance, tax, retirement and estate planning, experts said.

That’s changing, however, according to Andrew Blake, an associate director at Cerulli.

“The broader investor expectation is rapidly evolving, increasingly demanding that comprehensive, ongoing financial planning be included in their existing fee structure tied to assets — underscoring a pivotal shift towards more holistic, client-centric advisory services,” Blake wrote in an e-mail.

Flat dollar fee

A flat fee is like an AUM fee, except expressed in dollar terms. The consumer pays a specific sum of money to the advisor each year for an ongoing relationship.

The pros:

Compensation is transparent and predictable for clients, Cisneros said.Some firms using such a model don’t require clients to keep investable assets with them, which is good for clients who may want to manage their own money but need more aid with financial planning or who don’t want their fee tied to their account balance, she said.

The cons:

A flat dollar fee may be prohibitively high for consumers who don’t have several thousand dollars a year to pay their advisor out-of-pocket, experts said.

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Subscription, hourly and per-engagement fees

The pros:

These fees are simple, straightforward and transparent, experts said.Such models may be the most cost-effective way to access comprehensive financial advice for certain consumers. Monthly subscription fees, for example, are great for young consumers just starting out or those who don’t have a lot of financial complexity, for example, Cisneros said. Hourly and per-engagement fees may suit do-it-yourself investors who want a second opinion, or those who seek a one-off financial plan without an ongoing advisor relationship, she said.

The cons:

Consumers may feel less accountability and discipline with these models, and long-term results may suffer as a result, Cisneros said.A one-time financial plan may be out of date if a consumer’s life circumstances change, she said.Consumers may have a difficult time finding advisors that charge such fees: Less than 1% of advisors charged a subscription fee or hourly fee in 2024, according to Cerulli.

What to ask about fees

Ultimately, there are a few questions prospective clients should ask advisors about their fees, Berkenpas said:

How will I pay for your services?How much do you typically charge? This will vary, but advisors should be prepared to provide an estimate, according to the CFP Board.Do others stand to gain from the financial advice you give me? This is all about being transparent about potential conflicts of interest the advisor may have.

It can be hard for consumers to ask financial advisors how they’re paid, but consumers should be confident that it’s a common question to ask, Berkenpas said. The advisor should also feel comfortable answering, she said.

“Just ask the question and let the financial advisor explain it to you — and make sure as the consumer you understand what they’re saying,” Berkenpas said.



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