How Financial Advisor Fee Structures Work

By Arturo Conde | AUG 30, 2023

Managing your finances is necessary if you want to reach your ultimate goals. It’s what allows you and your family to live comfortably and to save for retirement, college and other major financial challenges. Though it’s possible to go at this alone, getting professional help in the form of a financial advisor is often a good idea. This option comes at a cost, of course, and it isn’t always easy to figure out exactly what you’ll be paying to an advisor and why. With that in mind, it’s important to learn about the major points of an advisor’s fee structure and how they work. Of equal importance is what you should be looking for when choosing an advisor. For help finding an advisor, use SmartAsset’s free financial advisor matching tool.

Breaking Down Financial Advisor Fee Structures

When you’re researching financial advisors, you may see an advisor's fee structure referred to. This basically defines how a financial advisor gets paid. The fee structure is generally focused on whether or not an advisor charges clients fees, receives commissions or uses a combination of the two.

There are various types of fees an advisor can charge, but any money you pay to the advisor specifically for their services counts as a fee. More details on types of fees will be in the section below.

Commissions, on the other hand, are discrete payments an advisor receives for buying a security or financial product like an annuity for a client. The size of the commission will depend on the type of product and the size of the order. In other words, certain sales will be more lucrative for the advisor than others.

What Is a “Fee-Only” Advisor Fee Structure?

A fee-only advisor only makes money from fees charged directly to clients. Such advisors make no extra commissions for selling certain things. That said, there are a few types of fees you might pay to a fee-only advisor, and it helps to know how each of them work:

• Asset-based fees: This is a general investing fee that’s based on the amount of assets an advisor manages for a client. It’s generally expressed as a percentage of assets under management over an annual basis. For instance, if an advisor charges a flat rate of 2% annually and you have $2 million under their management, you’ll owe $40,000 in fees each year. Many asset managers offer a progressive rate structure, with the percentage paid going down as total assets under management grow. You might pay 2% on the first $500,000, 1.5% on the next $500,000, 1% on the next million and 0.75% on any money over $2 million. 
• Hourly fees: These are fees paid based on the amount of time spent on a project. If an advisor charges $150 per hour for a financial plan and spends three hours on yours, you will owe your advisor $450.
• Flat fees: These fees are predetermined fees for a specific service, regardless of how much or little time an advisor spends on it. It’ll often be determined based on the complexity of the work. An advisor might charge $500, for instance, for a basic financial plan. In turn, that’s what you’ll pay, regardless of the time spent preparing it.
• Performance-based fees: These are the least common fees, as they’re based on how much an advisor-managed portfolio’s performance exceeds predetermined expectations. Generally, the fee will be a percentage - say 20% - of all capital gains above expectations. So if the expectation is a gain of $1,000 in value, and your portfolio gains $2,000, you’d owe a $200 performance fee. Performance-based fees are often charged by hedge fund managers, though some advisory firms have them too.

A fee-only advisor may charge any combination of the above fee types. However, that will be the only money they earn. You may still owe brokerage fees and fund fees such as operating expenses, but those will go to third parties, not the advisor or the firm they work for.

What Is a Commission-Only Advisor Fee Structure?

On the other side of the coin, you have commission-only advisors, who don’t charge any of the above fees. Instead, they are only compensated in the form of commissions for discrete transactions they carry out for a client.

There are various actions commissions may be paid for. A commission may be paid for buying into a mutual fund, for instance. A brokerage commission may come around for buying or selling securities like stocks, bonds and exchange-traded funds (ETFs). Insurance commissions are paid if an advisor is an insurance broker and sells you a policy, such as an annuity.

These advisors are generally less-involved in the day-to-day management of your money, as they aren’t earning a fee to do that. Furthermore, many of them will be only nominally employed at a registered investment advisor (RIA). Instead, their main employment will be at a broker-dealer or an insurance company.

What Is a “Fee-Based” Advisor Fee Structure?

Conversely, fee-based advisors are paid in both fees and commissions. Generally, their main employment will be at a RIA and they will have a secondary association with a broker-dealer or an insurance agency. 

It’s important here to consider the fiduciary standard, which states that advisors must act in the best interests of their clients. A fee-only advisor is also bound by the fiduciary standard, but a commission-based advisor may not be.

Fee-based advisors are a bit more complicated, though. While they are bound to the fiduciary standard when acting as an advisor, things can get a little mushy when they put on their broker-dealer or insurance agent hat. This is a potential conflict of interest, as the advisor may have a financial incentive to recommend a product that will net them a better commission. This isn’t a deal-breaker, though, as fiduciary duty is taken very seriously by the Securities and Exchange Commission (SEC). However, it is something to be aware of when picking an advisor.

Bottom Line

There are three basic fee structures for financial advisors: fee-only, commission-only and fee-based. Fee-based advisors are basically a combination of the previous two, as they can earn both fees and commissions. A fee-only advisor is always a fiduciary, while a fee-based advisor can have certain potential conflicts of interest. Commission-only advisors are not normally fiduciaries, though they aren’t financial advisors in the same way as the other two.

Tips for Finding a Financial Advisor

• This is a lot of information to consider, and it’s understandable if you need some help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Fee structure isn’t the only thing you need to think about when choosing a financial advisor. You’ll want to ask other questions, too, like what a potential advisor’s investment philosophy is (ie., growth or value), the types of securities they tend to invest in, whether their recommendations and actions are held to a “best interest” or a “suitability” standard and exactly what specific financial services are offered.

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