How do financial advisors get paid? A common question that arises in confusion while getting in touch with the finance planner.

Undoubtedly, a financial advisor is one who significantly helps you in managing your wealth and investments. But understanding how they charge for their services is equally important, especially if you’re new to the world of financial planning.

Financial advisors generally charge in four main ways: Assets Under Management (AUM), flat fees, hourly fees, and commission-based compensation. Each fee model works differently, comes with its own pros and cons, and suits different types of investors.

This article will let you explore the above fee structures of financial advisors in detail, which will help you in making an informed decision.

Fee-Only vs Fee-Based Advisors: How They Differ?

Before stepping forward to know: How do financial advisors get paid?. It’s essential to understand the two terms, fee-only vs fee-based advisors. These two compensation models may sound similar, but they work very differently.

Features	Fee-Only Financial Advisors	Fee-Based Financial Advisors
Conflicts of Interest	Fewer conflicts as they prioritize the client’s interest rather than personal benefit	A lot of conflicts arise as the advisors prioritize their own benefit over the clients’ interests
Compensation	High transparency, as they do not accept any compensation for product sales	Accept commissions from annuities, financial, and insurance products
Payment Structure	They can be paid either by a percentage rate, a fixed plan, or an hourly fee	Fixed fee planning, but also sell commission-based products alongside

So if you are willing to avoid conflicts related to interest, it’s ideal to choose fee-only financial advisors.

Detailed Overview: How Do Financial Advisors Get Paid?

Financial advisors provide financial guidance to their clients in several ways, including tax planning, estate planning, budgeting, and financial issues related to major life events.

So it’s essential to understand the financial advisor fee structure while you decided to partner with them.

Let’s break down the detailed overview of their fee structures:

Assets Under Management (AUM)

According to research, 68% of advisors indicated that they used an AUM fee structure, which is also known as a percentage flat rate. A financial advisor charges a percentage of how much you are going to invest with them. These % vary according to different market conditions.

Typically Range: Mostly, 1%- 2% AUM is commonly charged by traditional financial advisors, and can be less for robo advisors. But if the investment strategies are complex, this percentage can be increased.

Pros of AUM Fee Model

Below are some potential advantages of the AUM fee structure:

• Align advisor interest with the client’s portfolio growth
• Easy to calculate without hidden charges and frequent billing
• Advisors offer ongoing support without extra fees for each task

Cons of the AUM Fee Model

Here downsides of AUM outlined below:

• Revenue becomes heavily dependent on the financial markets’ performance
• Less suitable for clients with a small portfolio, as it will not generate enough revenue
• Lack of fee visibility because of the direct deduction from the investment account

Flat Fee Structure

Financial advisors who follow the flat fee structure usually charge their fee according to the complexity of your financial conditions and the service they provide. They set their rate according to their experience and the scope of their services.

Typically Ranges: The cost of working with a flat-fee adviser will vary, but typically ranges between $1,500 and $7,500 for holistic financial planning services like creating a financial plan, budgeting, tax planning, goal setting, and more.

Pros of Flat Fee Structure

Below are some main advantages of a flat fee structure:

• The client clearly knows the upfront cost of service, which prevents future surprises
• Unbiased advice, as an advisor’s income doesn’t depend on selling certain products
• Advisors are motivated to deliver quality service, as fees are already decided

Cons of Flat Fee Structure

Let’s have a look at the downsides of a flat fee structure:

• Expensive for clients with small portfolios or those just getting started
• Less focus on returns when income depends on the client’s portfolio growth
• Usually focuses on project-based work rather than continuous ongoing support

Hourly Rates of Financial Advisors

This financial advisor’s fee structure is designed according to the per-hour rate of their services. It is based on the client’s advisory needs and doesn’t change according to your asset level. It is ideal for temporary financial guidance rather than ongoing support.

Typical fees: According to industry data, hourly financial advisors often charge between $200 and $400 per hour, which depends on location and their experience.

Pros of the Hourly Rate Fee

Let’s see how beneficial an hourly fee structure is for you:

• You just paid for the specific guidance and the time you take
• Get personalized advice for specific needs without committing to long-term management.
• Ideal for clients with small portfolios, as it is cheaper than paying percentages.

Cons of the Hourly Rate Fee

Here are some downsides of per per-hour fee structure for financial advisory:

• It can be costly due to the longer sessions, especially if you are limited by your budget
• Less understanding of the time required to discuss their specific task.
• Clients feel hesitant to request more details and follow-ups to keep costs down

Commission-Based Fee

A financial advisor’s fee structure that is totally based on the commission earned by selling investment products or services to the clients. These financial advisors usually work for brokerage firms, insurance companies, or other financial institutions.

Typically Range: Most commission structures range from 1% to 6% of the invested amount, which depends on the type of product being sold.

Pros of Commission-Based Fee

Here are some main advantages of commission-based financial advisors:

• Lower upfront expense, as the client does not have to pay direct fees for the initial consultation
• Ideal for those who need a specific product rather than ongoing wealth management
• Advisors are more serious about completing their tasks to earn income

Cons of Commission-Based Fee

Below are some disadvantages of the commission-based fees of financial advisors:

• Hidden costs due to embedded fees and sales charges within financial products
• Prioritize personal interest by recommending products that are not suitable for the client
• Lack of ongoing support as compensation is usually earned through a one-time product sale

How to Calculate Your Effective Fee Rate?

If you are confused about how to calculate the effective fee rate of financial advisors. Here we’ll help you to calculate step by step:

1. Determine the total annual fees you paid to your advisor, including AUM, flat, hourly, and commission-based fees.

2. Convert all the fees into an absolute dollar term. For example:
If your advisor charges:

• 1% AUM on $200,000 = $2,000
• A flat annual planning fee of $800 = $800
• Fund expense ratios adding up to $300 annually = $300

Your total annual fee = 2,000 + 800 + 300 = $3,100

3. Gather all the fees and perform the calculation by using the effective rate formula:

Effective Fee Rate = (Total Annual Fees / Total Portfolio Value) × 100

4. Let’s see an example of how to calculate the fees:

Total fees: $3,100
Portfolio value: $200,000
Effective Fee Rate=(3100/200,000)×100=1.55%

So, even if your advisor charges a 1% AUM fee, your actual yearly cost becomes 1.55% after all additional fees are included.

Final Takeaway

Financial advice has become compulsory for making financial decisions at several life stages. By understanding how do financial advisors get paid, you’ll be able to decide how much to invest in financial guidance according to your needs.

If you have a smart portfolio, then financial advisors with an hourly fee structure are good for you. But if you want ongoing wealth management for your large-scale portfolio, then AUM(Assets Under Management) is better for you.

At Core Finance Planning, our goal is to offer a fee structure that reflects the true value of our expertise. Our professional team respects your time, your money, and your goals, and we always prioritize keeping costs aligned with your budget while putting your best interests first.