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How is My Financial Advisor Compensated?


Many investors do not understand how their financial advisor is compensated.

The three basic compensation models 

Commissions: The advisor is compensated for the sale of investments, insurance, or other financial products. Compensation is paid by the firm that provides the financial product, usually a mutual fund or an insurance company. This may be in the form of an up-front charge, trailing (ongoing) fees or a combination of both.

Fee-based: Typically the advisor will charge a fee for putting together a financial plan for you. If you chose to implement the recommendations in the plan, such as the purchase of insurance, an annuity, or investments, the implementation will typically be done via the sale of commissioned products.

How is My Financial Advisor Compensated?


Fee-only: The advisor charges a fee for the services rendered. This can be one-time or ongoing based upon the nature of your relationship and the services rendered. Fees may be hourly, flat or retainer based, or based upon a percentage of the assets under advisement.

Why should you care how your advisor is paid? Because his/her compensation can impact the choice of the products recommended to you and your return from those products.

An advisor who is paid via commissions will likely recommend those products that offer him a commission or sales load. Sales people generally sell what they are compensated to sell. Commissions can, therefore result in a huge conflict of interest for your advisor. Does she suggest the very best and lowest cost products or does she suggest those products that pay her the highest commission?

Fee-only advisors do not have this inherent conflict of interest because they are paid by the client, not the financial product provider. They are free to suggest the best investment vehicles and financial products for each client’s individual situation.

Should compensation be the only metric used to select a financial advisor?  Of course not, but the advisor’s compensation should be made crystal clear to you. When interviewing an advisor ask very direct questions. Ask them to detail ALL sources of compensation. These might include up-front commissions or sales loads; deferred or trailing commissions; surrender charges if you opt out of the mutual fund or annuity too early; a wrap fee on your overall investment account; or a myriad of other fees and charges in various combinations. While you will likely not be writing a check for any of these fees, make no mistake you are paying the freight. Excessive commissions or expenses serve to directly reduce your return on investment.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner . Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

Photo credit: Wikipedia

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  1. Roger,
    check out the article by Allan Roth (also a fee-only advisor). He acknowledges that any time compensation changes hands, there is ALWAYS the potential for conflicts of interest. http://moneywatch.bnet.com/investing/blog/irrational-investor/hourly-financial-advice-the-right-model/3460/#55770_303667

  2. Thank you for your comment. I saw Allan's article and also read most of his contributions to CBS Money Watch. He raises some excellent points. In terms of fee-only, it is not perfect, but in my opinion provides less opportunity for conflicts of interest than the other compensation models. AUM does have its inherent potential conflicts. A number of my fee-only peers work on a flat-fee basis, in part to minimize the this issue. I have a number of clients (both individuals and retirement plan sponsors) with whom I work on a flat-fee basis as well.

  3. Juan Aleman says:



  1. […] Whether or not you attend this type of session, you should be skeptical as to the connection between the estate planning attorney giving the presentation and the brokerage firm. Both a properly constructed estate plan and proper insurance coverage are key elements of one’s overall financial plan. I am very leery, however, when the providers of these services seem to have some sort of connection. You should ask whether there is any sort of financial arrangement here. […]

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