How Does a Financial Advisor Get Paid? Should You Use One?

Investing makes a lot of people nervous for a bunch of legitimate reasons. After all, putting your trust and hard-earned dollars in the wrong investment—or worse, with the wrong professional—can feel pretty darn scary. And then there are the fees to consider.

Investing is the best way to build long-term wealth, and even seasoned investors can find value in having a financial advisor guide their plan. Don’t buy the lie that all advisors are a rip-off and you’d be smarter to keep the fee and go it alone.

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So, how do you separate the good advisors from the not-so-good ones? You ask the right questions. And you keep asking until you find someone who’s a good fit for you. Today, let’s zero in on what could be the most important question you ask a potential financial advisor: “How do you get paid?”

How Do Financial Advisors Get Paid?

Financial advisors get paid through fees, commissions or a mix of both. The most common fee by far is a percentage of the money they manage for you, not an hourly rate or a flat charge.

Fee-Only

A fee-only advisor is paid directly by you, not through commissions on the products they sell. Most charge a percentage of the money they manage for you, called an assets under management (AUM) fee. Others charge an hourly, flat or retainer fee, but that’s usually for one-time advice or a financial plan rather than ongoing investment management.

Percentage of assets under management (AUM):This is the fee you’re most likely to run into: a set percentage of your account balance, charged every year up or down. The percentage stays the same, but the dollar amount changes as your balance does. Many advisors charge around 1%.² So if you have $250,000 invested and your advisor charges a 1% AUM fee, you’d pay about $2,500 a year, usually billed quarterly and deducted straight from your account.

Hourly fee: In this arrangement, you pay for the time your advisor spends meeting with you or working on your plan, typically an amount per hour. The fee is separate from your investments and usually works best for people who only need specific advice on a few investing topics.

Flat fee: If your advisor charges a flat fee, you’ll review a selection of services your advisor offers and choose the ones you need. For example, you might pay a flat fee of $3,000 for a bundle of services that includes an analysis of how much money you’ll need for retirement and a plan to get you there. Like the hourly rate, this fee isn’t tied to your investments.

Retainer fee: If your advisor charges a retainer fee, you’ll pay up front for an estimated amount of services or time. For example, if your advisor charges a $4,500 retainer fee at about $563 an hour, the retainer covers eight hours of your advisor’s time, no matter what services you need. Your advisor will bill you for any additional hours. But if the service you requested only takes your advisor four hours, you could receive a refund of the remaining retainer amount.

Commission-Only

A commission-only advisor gets paid when they sell you an investment, usually through a percentage of the money you put in, called a sales load. With a front-end load, the commission comes out of your initial investment before the rest gets put to work. Some products may also charge a fee if you sell, such as a back-end load or surrender charge.

For example, suppose you have $5,000 to invest and your advisor recommends a fund that charges a 3% front-end load commission. You’d pay $150 as the commission and invest the remaining $4,850.

Fee-Based (Commissions and Fees)

Fee-based advisors charge a combination of fees and commissions. For example, suppose you sit down with a fee-based advisor to invest $50,000 in your IRA. For $300 an hour, your advisor develops a detailed investing plan for you. That plan includes a mutual fund that charges a 3% commission, meaning you’ll pay your advisor $1,500 and invest the remaining $48,500. For two hours of work to develop your plan, you’ll pay the advisor $600.

$300 × 2 hours + $1,500 commission = $2,100 total fee

Which Financial Advisor Fee Structure Is Best?

The best fee structure is the one your advisor can explain to you clearly, in writing, before you invest a dime. Fee-only, commission-only or fee-based can all work with a pro who’s transparent and puts your needs first. What doesn’t work is an advisor who can’t (or won’t) tell you what you’re paying.

Different advisors use different pay models, but you don’t have to become a fee expert. Your job is to ask smart questions and know what to look for when you choose a financial advisor. After all, they’re the expert. They should be able to clearly explain how they get paid in a way you understand.

What Is a Reasonable Fee for a Financial Advisor?

A typical financial advisor fee is around 1% of your invested assets per year for ongoing management or $300 per hour.³ Where you land depends on where you live, how much you’re investing, and how complex your plan is.

Here’s a breakdown of what those costs could look like for each of the ways advisors are paid:

Here’s A Tip: A fiduciary is legally required to put your interests first. Brokers who sell investments follow a “best interest” rule when they make a recommendation, and some insurance products are sold under an even looser “suitability” standard. Ask any advisor point-blank which standard they’re held to, and don’t accept a vague answer.

Is a Financial Advisor Worth It?

Yes, a good financial advisor is worth it because investing is about more than picking a fund and hoping for the best. The right pro can help you:

• Pick the right mix of accounts for your goals
• Rebalance your investments when it’s time
• Stay calm when the market drops

Ron W., a member of THE Ramsey Baby Steps Community on Facebook, hired a financial advisor to help him save for retirement.

“Our financial advisor has the knowledge in areas we don’t especially as we go into retirement (when to take withdrawals and how). Early on in our relationship I challenged him often. We agreed to take part of our investments and invest how I wanted and he would do what he does with the remainder. His results were much better than mine.”

“Our financial advisor has the knowledge in areas we don’t especially as we go into retirement (when to take withdrawals and how). Early on in our relationship I challenged him often. We agreed to take part of our investments and invest how I wanted and he would do what he does with the remainder. His results were much better than mine.” – Ron W.

When you go it alone, it’s easy to let emotion take over. You panic-sell during a downturn to avoid more losses, then miss the rebound when the market recovers. The market is like a roller coaster. A good advisor keeps you from jumping off in the middle of the ride just because things get bumpy.

Research backs this up. People who work with financial advisors are more likely to practice the kind of habits that build lasting wealth over time. A recent study found that 92% of people with an advisor saved regularly versus 75% of those without one. They were also nearly twice as likely to contribute to a retirement account consistently.⁹

Look, no honest advisor is going to promise they can beat the market. What they can do is help you pick solid investments, stick to your plan, and avoid making a bad decision when fear takes over.

What Does a Financial Advisor Do That I Can’t Do Myself?

A good financial advisor can help you avoid expensive mistakes before they have years to compound. And those mistakes add up fast.

Take taxes, for example. Choosing between a traditional IRA and a Roth IRA comes down to when you pay taxes: now or in retirement. And that decision can make a big difference in how much of your money you get to keep down the road. An advisor looks at the whole picture with you so the choices you make now reflect the future you want.

What Questions Should I Ask an Advisor About Fees?

Before hiring a pro, you should ask for a clear, written breakdown of every fee you’ll pay, including expense ratios—the annual fee a mutual fund or exchange-traded fund (ETF) charges to cover operation and management costs. Here are a few more specific questions to bring to that conversation:

• Are you fee-only, commission-only or fee-based?
• What’s included in your fee, and what costs extra?
• Do you get bonuses or incentives for recommending specific funds or products?

Once you’ve asked those questions, prepare for your first meeting with a financial pro so you get the most out of it.

How Do I Find a Financial Advisor?

Take your time and talk with a few advisors before you choose one. You don’t have to work with the first person you meet. Look for someone who explains your options in plain English and helps you understand how each decision connects to your goals. And it’s worth repeating: Ask plenty of questions! A good pro will have patience and give you clear, honest answers.

If you already have an advisor but you’re not getting clear answers or service you feel good about, it might be time to reevaluate that relationship. Your retirement is too important to stay with someone who isn’t living up to their side of the deal.