How Financial Advisors Are Paid: Common Fee Structures Explained

Financial advisors can be compensated in several different ways, and the structure of those fees can influence how advice is delivered, what services are included, and how costs change over time. Many investors are familiar with one model but are less aware that alternatives exist.

Understanding how a financial advisor is paid does not tell you whether the advice will be good or bad. However, it does provide important context about incentives, expectations, and how the relationship is designed to work. This article outlines the most common fee structures used by financial advisors today and explains how each model typically operates.

1. Assets Under Management (AUM) Fees

The assets under management, or AUM, model charges a percentage-based fee on the total value of the assets an advisor manages on your behalf. This fee is typically assessed annually and deducted from investment accounts on a quarterly basis.

According to the 2024 Kitces Research on How Financial Advisors Actually Do Financial Planning, 92% of advisors incorporate AUM fees in some form, with AUM-based pricing serving as the primary compensation method for 86% of financial advisors. This makes AUM the dominant pricing structure in the advisory industry.

AUM fees generally range from approximately 0.5% to 1.5% per year. For clients with portfolios between $500,000 and $2 million, the fee commonly centers around 1.0%. As an example, an advisor managing a $1 million portfolio at a 1.0% annual fee would charge $10,000 per year, typically collected as $2,500 each quarter.

Some firms use tiered AUM pricing, where the percentage fee declines as assets increase. For instance, an advisor might charge 1.0% on the first $1 million, 0.75% on assets between $1 million and $3 million, and lower percentages beyond that. Tiered pricing is often used to attract and retain higher-net-worth clients while keeping overall fees competitive.

It is also important to understand that under an AUM model, advisory fees can rise over time even if the scope of services remains unchanged. As portfolios grow through market appreciation or additional contributions, the dollar amount of fees increases automatically. Some firms also apply scheduled fee increases or adjust pricing tiers periodically, which can further affect long-term costs.

2. Commission-Based

Under a commission-based compensation model, an advisor is paid by a third party when a financial product is purchased. This structure is commonly associated with brokerage services and insurance-related products such as mutual funds, annuities, and life insurance. Rather than paying the advisor directly, the cost of advice is embedded in the product itself.

Because compensation is tied to product sales, incentives under a commission-based model can differ from those in fee-based arrangements. Advisors may receive different commission amounts depending on the specific product recommended, which can influence how options are presented. For this reason, understanding how and when commissions are paid is an important part of evaluating recommendations.

Commission-based advisors are typically subject to a suitability standard, which requires that a product be appropriate for a client’s situation at the time it is sold. This standard differs from a fiduciary obligation, which requires advisors to act in a client’s best interest on an ongoing basis. The applicable standard depends on the advisor’s role, licensing, and the services being provided.

It is also important to note that commission-based compensation does not necessarily imply poor intent or a lack of professionalism. Many advisors operating under this model provide valuable guidance, particularly in areas where commission-based products are common. As with any compensation structure, clarity around incentives, disclosures, and ongoing service expectations is essential.

3. Flat Fee

Under a flat fee compensation model, an advisor charges a fixed dollar amount for advice that is not tied to the size of a client’s investment accounts. The fee is typically agreed upon in advance and may be billed annually, quarterly, monthly, or on a project basis depending on the scope of services provided.

Flat fee arrangements are commonly used for ongoing financial planning, retirement planning, tax strategy, or comprehensive advice. In some cases, the flat fee covers planning only, while in others it includes ongoing investment management alongside planning. Whether investment management is included varies by advisor and should be clearly outlined before an engagement begins.

One of the defining characteristics of flat fee pricing is cost predictability. Because the fee does not automatically increase as assets grow, clients can more easily understand what they are paying for advice itself. In many cases, advisors who charge a flat fee include built-in inflation adjustments over time. This structure can be appealing to investors who value transparency or whose portfolio size makes fee predictability especially important.

As with any compensation model, the value of a flat fee arrangement depends on the services included, the advisor’s expertise, and how well the structure aligns with a client’s needs and complexity.

4. Hourly Rate

Under an hourly compensation model, an advisor charges for the time spent providing advice, similar to how accountants or attorneys bill for their services. Clients pay only for the hours worked, and engagements are typically limited in scope and duration rather than ongoing relationships.

Hourly arrangements are often used for specific, one-time needs. Common examples include reviewing an existing investment portfolio, evaluating a pension buyout decision, providing a second opinion on a financial plan, or building projections for goals such as college funding or retirement timing.

Hourly rates can vary widely depending on the advisor’s experience, credentials, and area of specialization. It is not uncommon for rates to range from a few hundred dollars per hour to $1,000 or more for highly specialized or in-demand expertise. Because costs are directly tied to time, the total expense depends on the complexity of the issue and the amount of work required.

This structure may be appropriate for individuals who need targeted advice on specific financial questions but do not require ongoing planning or investment management services.

5. Hybrid Model

Hybrid compensation models combine elements of more than one fee structure, most commonly assets under management (AUM) fees and commission-based compensation. In these arrangements, an advisor may charge an ongoing percentage fee for managing investments while also earning commissions on certain products, such as insurance or annuities.

Hybrid models are often used by firms that offer both investment advisory services and product-based solutions. In practice, this structure allows an advisor to address a broader range of client needs within a single relationship. However, because compensation can come from multiple sources, understanding how an advisor is paid in different situations is especially important.

The applicable standard of care in a hybrid relationship can vary depending on the service being provided. Investment management services may be delivered under a fiduciary obligation, while product recommendations may be governed by a suitability standard. Advisors are required to disclose these distinctions, but clients should be aware that different rules may apply at different points in the relationship.

As with any compensation model, evaluating a hybrid structure requires clarity around fees, disclosures, and incentives. Asking how and when an advisor is compensated can help set expectations and reduce the likelihood of misunderstandings.

Financial Advisor Fees in Context

Financial advisors can be compensated in a variety of ways, and no single fee structure is inherently right or wrong. Each model comes with tradeoffs related to cost, incentives, service scope, and how the advisor–client relationship is structured.

Understanding how an advisor is paid is an important starting point, but it is only one part of evaluating whether an advisory relationship is a good fit. The services provided, the advisor’s experience, and how clearly fees and expectations are communicated all matter at least as much as the compensation model itself.

For investors comparing different approaches, it can be helpful to consider how fee structures behave over time and how they align with personal preferences around transparency, predictability, and involvement. Asking direct questions about compensation and services can help set clearer expectations and support more informed decisions.

Beyond compensation, investors may also want to understand the standard of care an advisor follows when providing advice. Some advisors act as fiduciaries at all times, while others operate under different standards depending on the service being provided. Knowing when an advisor is acting in a fiduciary capacity can provide useful context when evaluating recommendations.

It can also be helpful to review an advisor’s background, credentials, and regulatory history. Public databases such as the SEC’s Investment Adviser Public Disclosure (IAPD) system and FINRA’s BrokerCheck allow investors to verify licensing, review disclosures, and understand whether an individual or firm is authorized to provide advice, sell products, or both.

Finally, speaking directly with an advisor can offer insight beyond formal disclosures. How clearly fees, services, and expectations are explained, as well as how questions are addressed, can help determine whether an advisory relationship is likely to be a good fit.