How Do Financial Advisors Make Money? The Four Ways Advisors Get Paid

By Scott Blandford, Founder & CEO, Truthifi · Reviewed by the Truthifi Team · Last updated July 27, 2026

Financial advisors are paid in four main ways. They charge a percentage of the assets they manage (AUM fees, averaging about 1.05% a year), a flat or retainer fee (a median of about $4,500 a year), an hourly rate (a median near $300 an hour), or commissions on products they sell (roughly 1%–8%). Which model an advisor uses shapes both what you pay and the kind of advice you're likely to get.

This guide covers the advisor you hire: how they're compensated, which costs are visible and which aren't, and how the pay model connects to the legal standard your advisor is held to, so you can tell whether the arrangement fits your situation. For advisors, the same clarity works in your favor: a plainly stated all-in cost makes the value of your work easier for clients to see. For related topics, browse the Truthifi Education library.

Truthifi is not an investment adviser and doesn't give investment, tax or legal advice.

The four ways advisors get paid

Sources: Envestnet | MoneyGuide 2024; Kitces Research 2024; Mezzi/Kitces 2024; SmartAsset/Annuity.org 2024–2025.

AUM fees compress as balances grow: in the 2024 fee surveys cited above, about 62% of advisors charge at least 1% on a $1 million portfolio, but only 32% do at $2 million. Flat and hourly models offer an alternative for investors who want pricing that doesn't depend on portfolio size.

The cost most people don't see: 12b-1 fees and your "all-in" number

Here's one estimate worth knowing: an industry analysis by Bob Veres (Inside Information) suggests the all-in cost of working with an advisor may run closer to ~1.65% than the often-quoted 1%. That figure is a component-based estimate from a single analyst rather than a survey of actual client bills: it adds typical underlying fund expenses (~0.35%) and platform fees (~0.25%) on top of the advisor's fee. It works as a rough benchmark only; your own number may be higher or lower depending on your funds and platform.

One contributor is the 12b-1 fee, an annual distribution and marketing fee of roughly 0.25%–1.00% charged by certain mutual funds. It's paid from the fund's assets to the broker or advisor who sold the fund and embedded in the fund's expense ratio, so it typically doesn't appear as a line item on your advisor invoice. It's capped at 1.00% by FINRA rules (0.75% for distribution plus 0.25% for shareholder servicing). ETFs generally don't carry 12b-1 fees.

These fees are disclosed in each fund's prospectus, and that gap between the invoice and the prospectus is exactly why your all-in number is worth calculating.

Truthifi tip: a 12b-1 fee keeps running every year you hold the fund, long after the sale that triggered it. Truthifi lists each fund's reported expense ratio from the holdings in your connected accounts, so you can see which positions cost the most to own. See how it works.

Fiduciary vs. suitability: why the pay model shapes the advice

How an advisor is paid is tied to the legal standard they must meet, and that's the practical reason compensation matters.

• Registered Investment Advisers (RIAs) are regulated under the Investment Advisers Act of 1940, file Form ADV, and are held to a fiduciary standard: they must act in your interest ahead of their own and aren't supposed to recommend a product simply because it pays them more.

• Broker-dealers have historically been held to a suitability standard, tightened in 2020 by Regulation Best Interest (Reg BI). Under the older suitability bar, a broker could recommend an investment that paid them more than a comparable alternative, as long as both were "suitable."

For current figures on the registered-adviser industry, see the IAA Investment Adviser Industry Snapshot 2025. In practice, fee-only and flat-fee options are widely available if you'd prefer advice that isn't tied to product sales.

One nuance: dual-registered advisors (firms registered both as a broker-dealer and as an RIA) can act as a fiduciary when giving advice and as a broker when selling a product, sometimes in the same conversation. The arrangement is legal; the useful move is to ask which "hat" your advisor is wearing for each specific recommendation.

Commissions and annuities: a concrete example

Commissions are often the least visible model because the product provider, not you, cuts the check. Annuities are the clearest example. A fixed-indexed annuity commonly pays the selling agent 5%–8% of the contract. On a $200,000 annuity, that's roughly $10,000–$16,000, paid by the insurance company rather than deducted from your account, so you usually won't see it on a statement.

Commission size tends to track product complexity: variable annuities often run 4%–9%, while simpler immediate annuities pay agents only about 1%–3%. An annuity can still be the right tool for some people. If you want pricing that doesn't depend on which products you buy, a fee-only or flat-fee advisor is the more direct fit. What the numbers show is that a "no-fee" recommendation may still carry meaningful compensation behind it.

Questions worth asking (and one benchmark to know)

A few plain questions cover most of what you'd want to know:

• "How are you paid for this recommendation?" Fee-only, commission, or both.

• "Are you acting as a fiduciary here?" Especially useful with dual-registered advisors.

• "What's my all-in cost, including fund expense ratios and any 12b-1 fees?"

Our recommendation: before you sign anything, ask for your all-in cost in writing, expressed as a single percentage. Then check that figure against your actual holdings: connecting your accounts to Truthifi shows the fund expense ratios a quoted advisory fee can leave out, as the next section explains. A written number also gives you a reference point for each annual review.

One benchmark is worth knowing for accounts where a broker trades frequently. FINRA's quantitative-suitability rule (Rule 2111) names turnover rate and cost-to-equity ratio as measures of excessive trading. Some industry commentators cite an annualized turnover rate of 6 (the portfolio turning over six times a year), or a cost-to-equity ratio above 20%, as a possible red flag in churning cases. These are rules of thumb rather than bright-line thresholds in the rule itself. If trading activity and costs seem high relative to your account, it's a fair thing to ask about.

How to check how your advisor is paid

You can verify most of this yourself in a few minutes:

1. Form ADV Part 2A: an RIA's required disclosure brochure, which spells out how the firm is compensated and any conflicts of interest.

2. FINRA BrokerCheck (brokercheck.finra.org): background, registrations, and any disclosures for brokers and firms.

3. SEC Investment Adviser Public Disclosure (adviserinfo.sec.gov): the same lookup for registered advisers.

Where Truthifi fits: part of advisor compensation is embedded in your funds rather than billed to you. Truthifi reports that it connects to accounts at 18,000+ financial institutions, reads your actual holdings, and matches each fund to its reported expense ratio, so it can estimate your all-in cost from your real holdings rather than an industry average. Coverage depends on the data each institution shares, so costs not reported through a connection, such as some platform or wrap fees, may not appear. Truthifi is a flat-price analysis tool (a free tier plus several paid plans, including Monitoring at $79.99/year) that charges no AUM fee, takes no commissions, and earns no referral or affiliate revenue, so what it reports isn't tied to what you buy. It's not an advisor and doesn't give investment advice. See how Truthifi keeps your accounts secure.

Frequently asked questions

How do financial advisors make money? Mainly four ways: AUM fees (~1.05%/year of assets managed), flat or retainer fees (~$4,500/year), hourly rates (~$300/hour), and commissions on products they sell (1%–8%). Many advisors combine models, for example an AUM fee plus commissions on certain products.

How do financial advisors get paid if they don't charge me directly? Through commissions and embedded fees. Product providers pay commissions (common with annuities and some funds), and mutual funds can pay ongoing 12b-1 fees from fund assets. Both come out of the product rather than a bill you see, which is why your "all-in" cost can be higher than the fee you agreed to.

Do financial advisors make money if I lose money? Under an AUM model, an advisor's fee falls when your balance falls, since it's a percentage of assets, but you still pay the fee in a down year. Flat, hourly, and commission models generally aren't tied to your returns.

How do financial advisors make money from mutual funds? Two ways: some funds pay 12b-1 distribution fees to the advisor or broker who sold them, and commission-based advisors may earn a sales load when you buy certain funds. Fee-only advisers who use low-cost index funds generally avoid both.

Do financial advisors make money on annuities? Often, yes, through commissions paid by the insurer. A fixed-indexed annuity commonly pays the selling agent 5%–8% of the contract, variable annuities often 4%–9%, and immediate annuities about 1%–3%. Because the insurer pays it, the commission usually won't appear on your statement.

What's the difference between a fiduciary and a broker for compensation? A fiduciary (typically an RIA) must put your interests first and isn't supposed to recommend a product just because it pays more. A broker has historically been held to a "suitability" standard, tightened by Reg BI in 2020. The pay model and the legal standard are linked, which is why asking how someone is paid tells you a lot.

Your fee shouldn't stay frozen while your balance grows

Many people review their advisor's fee once, at signing, and rarely revisit it. As the breakpoint figures in the first section show, AUM pricing usually steps down with size, so a rate that was competitive when you started may not be after a decade of saving. If your balance has crossed a breakpoint since you signed, that's a natural moment to ask whether your rate changes with it.

Want to see your own all-in number? Truthifi shows the fund costs you're actually paying on top of your advisor's fee. Start on the free tier: Get started with Truthifi, see how Truthifi keeps your accounts secure, or keep learning in Truthifi Education.

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About the author: Scott Blandford is the founder and CEO of Truthifi, a flat-price investment analysis tool built to show investors what they actually pay and own. Reviewed by the Truthifi Team. Truthifi is not an investment adviser and doesn't give investment, tax or legal advice.

For education, not investment advice. Sources: Kitces Research 2024; Envestnet | MoneyGuide 2024; Inside Information (Bob Veres); SEC/FINRA rules on 12b-1 fees and Reg BI; IAA Investment Adviser Industry Snapshot 2025; FINRA 2025 Industry Snapshot; FINRA Rule 2111 (quantitative suitability) and churning case law; Annuity.org / SmartAsset 2024–2025.

See what your advisor's pay model costs you: Connect your accounts to Truthifi to see your all-in advisory fees from your real holdings before your next advisor review. See how Truthifi keeps your accounts secure