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How do financial advisors make money? Fees you need to know

They usually take fees as a portion of your total investment, commission on certain investments or products, or both.



April 19, 2024

6 min read

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Key takeaways
  • Financial advisors make money from fees, commissions, or a combination of both. They can also earn a salary if employed by a firm.
  • Financial advisors can charge fees as a percentage of your total investment, a flat rate, or by the hour. You might also agree to pay them performance bonuses if your investments reach certain milestones.

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      The last thing you want to worry about when you start saving for retirement is how much money someone else will earn off your investments. If you work with a financial advisor, managing your funds is their job, but exactly how do financial advisors make money? They usually make money from fees, investments, or a combination of the two.

      We’ll dig in below to explore the different types of investor income models and what they mean for your money. We’ll also point out what to look for so you know how much is too much to spend on a financial advisor.

      Top two ways financial advisors make money

      Most financial advisors make money by charging fees, earning commissions from selling certain financial products, or a combination of the two.

      If a firm employs a financial advisor, they may earn a salary and performance-based bonuses instead of drawing their earnings from fees or commissions.


      Some advisors earn money solely from fees, called fee-only financial advisors. The most common way for advisors to charge this fee is as a percentage of the assets you’ve invested with them, called an assets under management (AUM) fee. So if you invest $1 million at a 1% AUM, you’ll pay a $10,000 fee.

      AUM fees aren’t the only fee structures you might see from an advisor, though. Some charge flat rates based on the service you choose, some charge by the hour, and others still get bonuses based on your investment performance.

      Financial advisor fee structure: How it earns them money:
      Assets under management (AUM) fee The advisor takes a percentage of all the assets you’ve invested, including your earnings. The more money you’ve invested, the lower the percentage (usually).
      Fixed-rate fee The advisor charges a flat rate for a specific investing service.
      Hourly rate fee The advisor earns a fee per hour for consulting or a specific investing service. It might include a retainer for a certain number of hours per month or quarter.
      Performance-based fee The advisor earns a bonus if your investment reaches a certain predefined milestone amount.

      While fixed-rate and hourly fees and performance bonuses usually don’t fluctuate, it’s common for AUM fees to change based on the dollar amount you’ve invested. This typically leads to lower percentages charged as you invest more money or your earnings increase.

      For example, while you’re charged 1% on that $1 million in the bank from the example above, you might be charged 0.9% on a balance of $3 million.


      Commissions are earnings from the sale or trade of a certain financial product like a mutual fund. Most advisors who earn commissions will earn them on top of a fee, known as fee-based financial advisors. This is because your purchase of those commission-based assets isn’t guaranteed, and you’ll still need to compensate the advisor for managing the rest of your fund.

      Image shows potential conflicts of interest for financial advisors

      This pay structure can lead to a conflict of interest for a few reasons.

      Potential conflict of interest: Why it’s a problem:
      Incentive to sell certain products They might be motivated to recommend financial products or investments that offer higher commission rates, which can lead to a bias toward products that might not be in your best interest.
      Short-term focus They might prioritize transactions that generate immediate income for themselves, potentially disregarding your long-term financial goals.
      Churning Some advisors might excessively buy and sell securities to generate more income. This can result in additional costs for you without necessarily benefiting your portfolio.
      Product complexity Commissions might encourage advisors to recommend complex financial products that pay higher percentages, even if you don’t understand them. This lack of transparency can expose you to higher risk.
      Sales quotas and targets Financial firms often set sales quotas and targets for their advisors. Commissions can pressure advisors to meet these goals, which may not always align with what’s best for your financial well-being.

      Registered investment advisors (RIAs) are held to a fiduciary standard when they register with the Securities and Exchange Commission (SEC). This requires them to act in your best interest at all times – meaning they should focus on reducing your taxable income and growing your investments, not padding their pockets.

      If you’re considering a fee-based financial advisor, make sure you understand the terms of their commission incentives and don’t agree to any investments you don’t understand.

      How much do financial advisors earn off your investments?

      According to the most recent available data, the average AUM fee for a financial advisor is between 0.59% and 1.18%.

      Advisor pay structure: Average:
      AUM fee 0.59%–1.18%
      Fixed-rate fee $7,500–$55,000
      Hourly rate fee $120–$300

      All averages in this table are sourced from an AdvisoryHQ study.

      What about robo-advisors?

      Robo-advisors are a way to reduce the cost of investment advice, using algorithms to choose between investments. They might help you make sense of tax-deferred or tax-free investments, but they’re usually less costly because they require little (or no) human involvement, leading to lower fees. The same study above pegs the average robo-advisor fee in the 0.25% to 0.5% range.

      However, some investment apps charge a flat rate to create your financial plan. This means they don’t mess with AUM fees and instead charge a rate depending on your financial goals and how much you have to invest. 

      How do I compare these costs?

      We get it: These fees are a huge party pooper when it comes to getting excited about investing. But if you want financial advice and don’t want to DIY your investment strategy (like most people), then you’ll likely have to shell out at least some money in return.

      If a financial advisor is registered, it makes comparing them to other advisors a little easier.

      How to determine your financial advisor is registered with the SEC

      The first thing you should do when looking for financial advisors is search the SEC’s Investment Adviser Public Disclosure (IADP) database. It’s free for anyone to use, and a financial advisor will only show up there if they’ve completed Form ADV.

      The form (and the database) highlights certain info for client transparency, like an advisor’s professional history, how they structure their fees, and their asset mix. You can then research these assets to get an idea of typical gains and losses and compare that against the advisor’s fee to determine if you want to use their services.

      However, there’s not enough available data to measure the exact success rate of advisors. Investing doesn’t offer guaranteed returns, and there’s always some risk to taking the plunge and putting your money on the line.


      Financial advisor returns on the brain? Check out these frequently asked questions.

      What is the success rate of financial advisors?

      Only 28% of rookie advisors continue in their careers, according to data from Cerulli Associates. Most estimates put the success rate of financial advisors after three years at 10% or less.

      Do millionaires use financial advisors?

      Yes, millionaires use financial advisors. In fact, financial advisors will often charge a lower percentage fee the more money you invest with them. And millionaires often have highly diversified portfolios, meaning they’re especially difficult to manage without a little professional financial help.

      Do financial advisors make money from mutual funds?

      Financial advisors can make commissions from a mutual fund if their client invests in it, so long as the advisor is also a broker.

      The Playbook take

      Financial advisors are there to make you money, though not all advisors will act in your best interest. Plus, they can charge hefty fees that might hamper your investment growth and add to your retirement timeline.

      Though, not all advisors charge heavy AUM fees. Instead, some services charge a low flat rate to create an airtight financial plan and boost your net worth. You can also work on minimizing your tax bill, which is the best way to grow your investments over time and see higher returns.

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      About the author

      Phil Wettersten, Series 7 & 66

      Head of Product Success

      Phil holds both Series 66 and Series 7 credentials and previously served as an Investment Consultant at TD Ameritrade. At Playbook, he's the authoritative voice representing our customers, spearheading product enhancements and strategic planning. Phil's unwavering dedication keeps us ahead in delivering top-notch user experiences.

      Theo Katsoulis, CFA

      Head of Investments

      Theo brings an extensive background in Institutional Asset Management. With a B.A. from Villanova University's School of Business, and having passed the rigorous Series 65 and CFA examinations, he brings significant expertise from portfolio management to understanding intricate financial infrastructures. As Head of Investments at Playbook, he ensures consumers receive exceptional diligence and care for their investment portfolios.

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