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How your advisor gets paid directly affects the advice you receive. Understanding compensation models helps you choose wisely and avoid conflicts of interest.
The Three Main Models
Fee-Only (AUM-Based)
The advisor charges a percentage of assets under management—typically 0.5% to 1.5% annually. A $500K portfolio costs $2,500–$7,500/year.
Alignment: Advisor earns more when your portfolio grows
No product incentives: No commissions means unbiased advice
Comprehensive: Usually includes financial planning, not just investing
Trade-off: Expensive for large portfolios; fees compound over time
Advisor earns commissions when you buy financial products—insurance, annuities, or mutual funds with sales loads. The product company pays them, not you directly.
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Conflict risk: Advisors may recommend products that pay them well, not necessarily what's best for you. Hidden costs are built into the products.
No upfront cost: You don't write a check for advice
May fit: If you specifically need insurance products
Trade-off: Surrender charges if you change your mind; potential bias
Quick Comparison
Model
Best For
Watch Out For
AUM Fee
Ongoing portfolio management
High costs on large portfolios
Hourly/Flat
One-time planning needs
Implementation is on you
Commission
Specific product purchases
Conflicts of interest
Note: Some advisors also use performance-based fees (a share of investment gains), but these are typically reserved for high-net-worth clients and hedge funds.
What "Fee-Only" Really Means
Fee-only means the advisor's compensation comes entirely from clients—no commissions, kickbacks, or referral fees. We flag advisors as "Fee-Only" when their SEC Form ADV indicates they don't receive commission-based compensation.
Watch for confusing terms:
"Fee-based" often means fees PLUS commissions
"Commission-free" might still include other compensation
"No-load" refers to funds, not advisor compensation
Choosing the Right Model
Large portfolio ($1M+)? Consider hourly/flat fees—AUM fees add up fast
Need ongoing management? AUM makes sense if you want hands-off investing
Just need a plan? Hourly or flat-fee for one-time advice
The most important thing: understand how your advisor gets paid before working together. Ask directly—a trustworthy advisor will explain their compensation clearly.
