How Do Financial Advisors
Get Paid?
One of the most useful questions you can ask a financial advisor during an initial meeting or consultation is also one of the simplest: how do you get paid? The answer can tell you a lot about the relationship they can provide, the incentives inside it, and the kinds of recommendations you may get from them.
Below is an outline of four common fee models: assets under management, per-trade commissions, sold-product commissions, and flat-fee or retainers. Each model comes with different tradeoffs around alignment, access, and cost visibility. If you’re choosing an advisor, it helps to understand the advisor’s fee model so you know exactly what services you’re paying for.
Assets Under Management
Assets under management, often shortened to AUM, generally means the advisor charges an ongoing percentage based on the amount of money they manage for you. The main benefit is the alignment of financial incentives with your advisor; the more your investment grows, the more the advisor makes. You both benefit from a growing portfolio, so you can be sure your advisor will make recommendations that support that result.
While AUM can make a lot of sense for many investors, the most common tradeoff of this compensation model is advisor minimums. Advisors may not agree to work with clients whose investment portfolios are too small to pay them a meaningful percentage.
Per-Trade Commissions
Per-trade compensation means an advisor or broker earns a commission when securities are bought or sold on your behalf. This can sound simple, but it often creates a conflict of interest between the advisor and the client. Advisors may be incentivized to maximize the number of trades they make on your behalf, rather than solely make moves that benefit your portfolio.
The major upside of this model is that you don’t pay your advisor unless they take action on your behalf. This fee structure can sometimes benefit investors who are in the process of building up a small portfolio.
Commissions from Sold Products
Some advisors or brokers may be compensated through the sale of investment or insurance products. The more trades or product sales made, the more the advisor earns.
This fee structure creates a clear conflict of interest between the investor or client and the advisor. The advisor is incentivized to recommend the products that pay them, not what is best for your particular financial situation or portfolio. This conflict of interest does not necessarily mean brokers provide worse financial advice or planning than fiduciary advisors, but it does mean you may not be getting the personalized recommendations of a fiduciary advisor.
Flat-Fee or Retainer Arrangements
Flat-fee or retainer arrangements generally mean the client pays a set fee for advice, planning, or ongoing engagement. This model typically aligns advisor incentives more closely with the client than commission-based structure because the fee is not tied to product sales.
Some people may prefer the up-front transparency of a flat fee compared to AUM, and advisors who offer flat-fee arrangements can sometimes have lower AUM minimums for working with clients. The major drawback compared to AUM percentage fees, however, is that the client must continually pay out of pocket for their advisor’s service. This can be expensive over time. Another drawback is the advisor earns the same fee regardless of performance, unlike AUM, which scales with your investment performance.
Why Fee Structure Matters
When you evaluate a financial advisor, the first step should be understanding what the advisor is being paid to do. A clear answer should tell you whether the relationship is built around planning, portfolio management, product sales, transactions, or some combination.
Questions to ask
What are all the ways you are compensated?
What fees would I pay directly?
Are there investment expenses or product costs beyond your fee?
Do you receive commissions, revenue sharing, or incentives from providers?
How would you describe your compensation model in one sentence?
What Fee Transparency Sounds Like
Good advisors are comfortable explaining their compensation model to you in plain language. You should not have to guess or decode how their answer will affect your relationship.
Even if the explanation is complicated by nature, you should still come away understanding the basic arrangement and what you are paying for. Otherwise, you will have a difficult time judging whether the advisor relationship is a good fit for you.
Zoe can match you with fiduciary advisors who operate across several different fee models. Find your advisor matches through our quiz:
