Investors on Financial Advisor Fees: Finding the right financial adviser is crucial for good money management, but understanding how they are paid can provide insights into any biases that may exist and help you ensure their advice truly works in your best interests. Additionally, this piece dissects some of the most common compensation models used in the industry, and discusses benefits and drawbacks to each type — all in an effort to help you select a financial advisor that’s right for your long-term financial goals.
- Financial advisers charge commissions or fees for their services.
- According to experts, each type has advantages and disadvantages.
- Understanding how an adviser makes money helps you safeguard your returns.
When selecting a financial adviser, it’s critical to understand how the expert is compensated.
To customers, it may seem to be an easy question to ask, but the answer is not always clear.
According to a 2023 Hearts & Wallets poll, over 36% of customers are unsure how they pay for a savings or investment connection with a financial business. Another 20% stated they believe their financial services are free.
Many of the customers are undoubtedly misinformed, however, some advisers and organisations do provide pro bono guidance to impoverished regions.
“Everybody gets paid one way or another,” said Kathryn Berkenpas, managing director of corporate development at the CFP Board, which governs the certified financial planner credential.
The latter might have several sub-categories. Consumers may pay an annual dollar cost, a monthly subscription price, a one-time fee for a single consultation, or an annual charge, depending on assets under management.
Depending on the services supplied, an adviser may employ many of these models with the same customer.
Advisors explained that each solution has advantages and disadvantages.
“It’s important to understand what fees are charged, what services are included, and what conflicts of interest may exist,” said Gloria Garcia Cisneros, a certified financial planner in Los Angeles and member of CNBC’s Financial Advisor Council.
Here’s an overview of typical compensation options.
Commissions
Commissions are one-time payments made by financial firms to advisors for selling certain products like annuities or life insurance.
Commissions are in decline. According to Cerulli, around 23% of advisers got commissions in 2024, with that figure predicted to rise to 16% by 2026.
Pros:
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- According to Lee Baker, a financial planner based in Atlanta and member of CNBC’s Financial Advisor Council, commissions may be the most cost-effective approach for some individuals to get advice regarding a certain financial product. Consumers should not expect to have an ongoing connection with the adviser after the transaction, he said.
Cons:
- According to experts, commissions may create a conflict of interest in certain circumstances. For example, an adviser may be enticed to promote a poor financial product that earns a greater fee over an excellent product that pays less. The same is true outside of finance, such as when buying a vehicle or a house, according to Cisneros, a wealth manager at LourdMurray. “You need to go in knowing your numbers, because you have no one batting for you on the other end,” she told the audience.
- If consumers are not vigilant, they may encounter issues with commission-based goods in the future. According to Cisneros, depending on the conditions, insurance and annuity contracts might be difficult and expensive to cancel after purchase.
Asset-based fees are applied to a client’s assets under management.
Such fees are imposed yearly and indicated as a percentage (often 1%). For example, an adviser managing $1 million for a client would charge $10,000 in fees per year.
The customer does not write a cheque for this amount; advisers deduct the charge immediately from their investment account.
Asset-based fees are the most popular kind of adviser compensation: Cerulli estimates that around 72% of advisors earned an AUM fee in 2024, with this figure predicted to climb to approximately 78% in 2026.
Pros:
- In certain ways, the model is easy to grasp. It’s a set cost that doesn’t fluctuate over time, providing stability. “It’s simple, and it aligns with the client’s intentions,” said Cisneros. “The idea is to help your portfolio expand. There is a mutual motivation that you both share.”
- According to experts, the strategy may be appropriate for customers who have a large sum of money to invest and wish to get continuing financial advice or have their adviser handle it for them over time.
Cons:
- While the charge does not change in percentage terms from year to year, it does vary in dollars depending on the size of one’s portfolio. In years when the stock market surges, some believe that advisors profit financially even if they don’t provide much value – portfolios are expected to expand regardless, according to Baker. Of course, in low years, the adviser may lose money, he noted.
- The strategy may also exclude customers with a low level of investable assets, since advisers may find it unprofitable to take on such clients. The “lack of availability to the masses” is the major disadvantage of the AUM model, according to Cisneros.
- AUM fees may “fly under the radar” for consumers since they are withdrawn from client accounts behind the scenes, according to CFP Board member Berkenpas.
According to experts, advisors that follow the AUM model may simply provide investing advice rather than full financial planning that includes budgeting, debt reduction, insurance, tax, retirement, and estate planning.
That is changing, according to Andrew Blake, an assistant director at Cerulli.
“The broader investor expectation is rapidly evolving, increasingly demanding that comprehensive, ongoing financial planning be included in their existing fee structure tied to assets — underscoring a pivotal shift towards more holistic, client-centric advisory services,” Blake said in a letter to the editor.
A flat dollar charge
A flat charge is similar to an AUM fee, but represented in dollars. The customer pays the adviser a certain amount of money each year for a continuing connection.
Pros:
- Clients benefit from clear and predictable compensation, according to Cisneros.
- Some businesses that use this approach do not need customers to hold investable assets with them, which is beneficial for clients who want to manage their own money but need additional assistance with financial planning or do not want their fee connected to their account balance, she said.
Cons:
- Experts warn that a flat price may be unreasonably expensive for clients who do not have several thousand dollars to pay their adviser out of pocket each year.
Subscription, hourly and per-engagement fees
Pros:
- Experts said the costs are clear, obvious, and open.
- Certain customers may find that such models are the most cost-effective method to get complete financial guidance. Monthly subscription rates, for example, are ideal for young customers who are just getting started or have less financial complexity, according to Cisneros. Hourly and per-engagement fees may be appropriate for do-it-yourself investors looking for a second opinion or those seeking a one-time financial strategy without an ongoing adviser connection, she added.
Cons:
- Consumers may perceive less responsibility and discipline with these methods, resulting in poor long-term outcomes, according to Cisneros.
- A one-time financial plan may go out of date if a consumer’s living circumstances change, she said.
- Consumers may have difficulty locating advisers who demand such prices. Cerulli estimates that less than 1% of advisers will charge a subscription or hourly fee in 2024.
What to ask about fees
Finally, Berkenpas suggested that potential customers ask advisers about their fees the following questions:
- How can I pay for your services?
- How much do you generally charge? This will vary, but the CFP Board recommends that advisers be prepared to offer an estimate.
- Do others stand to benefit from the financial advice you provide me? This is all about being open about any possible conflicts of interest that the adviser may have.
Consumers may find it difficult to ask financial advisers how they are compensated, but Berkenpas believes it is a typical inquiry. She said that the advisor should feel at ease addressing questions.
“Just ask the question and let the financial advisor explain it to you — and make sure as the consumer you understand what they’re saying,” Berkenpas told.
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