Understand how financial advisors get paid – and how that affects their advice
When it comes to your money, trust is everything. You want a financial advisor who puts your best interest first—not someone who’s just trying to sell you something. But how can you tell? One of the most important clues lies in how they get paid.
In this post, we’ll explore the two main types of financial advisors—fee-only and commission-based—and help you understand what that means for you. We’ll also look at a third category, fee-based advisors, who combine both models. Knowing the difference can help you make smarter, more confident choices when it comes to protecting and growing your hard-earned savings.
Why It Matters
Imagine visiting a doctor who gets paid based on the number of prescriptions they write, or the type of medicine they recommend. Would you trust their medical advice completely?
The same logic applies to financial advice. How an advisor earns their income can create incentives—and those incentives can affect the advice they give.
Let’s break it down.
What Is a Fee-Only Advisor?
A fee-only advisor earns money only from the fees you pay them directly. That’s it. They don’t earn commissions from insurance companies, mutual funds, or brokerage firms for selling you financial products.
There are typically three ways a fee-only advisor might charge you:
- Hourly: You pay for their time, like a lawyer or a consultant.
- Flat fee: You pay a set amount for a specific service—like creating a retirement plan or managing your investments.
- Percentage of assets under management (AUM): You pay a percentage of your portfolio each year (commonly around 1%).
Because fee-only advisors don’t earn money by selling you products, their advice is generally considered more objective. They succeed when you succeed. This model is often preferred by people who want:
- Transparency
- Fewer conflicts of interest
- Long-term guidance based on your personal goals
What Is a Commission-Based Advisor?
A commission-based advisor earns money by selling financial products, like mutual funds, annuities, life insurance, or investment accounts. Instead of billing you directly, they’re paid by the companies whose products they recommend.
This means you may not see an invoice or know exactly how much you’re paying. But make no mistake—you are paying. The cost is built into the products.
Here’s the concern: a commission-based advisor may be more likely to recommend products that pay them the most, even if those aren’t the best fit for your needs. That doesn’t mean all commission-based advisors are bad. Many are ethical and care deeply about their clients. But the potential for bias is greater.
You might consider working with a commission-based advisor if:
- You’re buying a one-time product (like life insurance) and want someone who specializes in that area
- You can’t afford ongoing financial planning and just need a specific product
- You understand what you’re buying and how the advisor is compensated
What About Fee-Based Advisors?
This term can be confusing. A fee-based advisor charges fees and earns commissions. They might charge you a fee for managing your investments but also get paid a commission for selling an annuity or insurance policy.
Some fee-based advisors follow a fiduciary standard (more on that in a moment), while others don’t. If you work with a fee-based advisor, be sure to ask:
- What services are covered by the fee?
- What additional commissions or incentives do they receive?
- Do they always act as a fiduciary?
Fiduciary vs Suitability: A Crucial Difference
Another way to evaluate an advisor is by asking if they follow a fiduciary standard. A fiduciary is legally obligated to act in your best interest, even if it means recommending something that pays them less.
By contrast, a non-fiduciary only needs to recommend products that are “suitable” for you—not necessarily the bestoption. Many commission-based advisors fall into this category.
Here’s a quick comparison:
- Fiduciary: Must prioritize your best interests. (Common with fee-only advisors)
- Suitability: Must recommend products that are merely appropriate. (Common with commission-based advisors)
To protect yourself, ask this direct question:
“Are you a fiduciary at all times when working with me?”
A clear yes is a good sign.
Pros and Cons at a Glance
Fee-Only Advisors
✅ Transparent pricing
✅ No product sales pressure
✅ Typically fiduciaries
❌ May cost more upfront
Commission-Based Advisors
✅ May seem “free”
✅ Can be helpful for specific product needs
❌ Conflicts of interest are possible
❌ Less transparency on what you’re paying
Fee-Based Advisors
✅ Can offer both ongoing planning and product expertise
❌ Potential for confusion or mixed incentives
❌ May not always act as a fiduciary
How to Choose the Right Advisor for You
Here are some practical tips to help you find someone you can trust:
- Ask how they get paid. Don’t be shy—this is your money we’re talking about!
- Request a written explanation. Good advisors will clearly explain their compensation structure.
- Check their credentials. Look for designations like CFP® (Certified Financial Planner) or RIA (Registered Investment Advisor).
- Search for fiduciaries. Use databases like NAPFA.org, XYPlanningNetwork.com, or FeeOnlyNetwork.com.
- Understand what you’re getting. Are you paying for investment management, financial planning, tax strategies, or insurance advice?
Real-Life Example
Let’s say you’re 65 and ready to roll over your 401(k). A commission-based advisor might suggest putting the whole thing into a high-commission annuity. A fee-only fiduciary might recommend a mix of low-cost ETFs, a withdrawal plan, and possibly a small annuity to cover basic expenses.
Which advisor is “right”? That depends on your goals—but it’s easier to trust advice when you know it’s not driven by commissions.
The Bottom Line
There’s no one-size-fits-all answer, but here’s a good rule of thumb:
If you want objective, comprehensive financial advice, start with a fee-only fiduciary.
That doesn’t mean all commission-based advisors are bad—or that all fee-only advisors are perfect. But when you understand how your advisor gets paid, you can better understand why they recommend what they do.
And that’s the first step toward building a financial plan you can believe in.
Disclaimer: This article is for informational purposes only and is not intended as financial advice. Please consult with a qualified professional who understands your specific financial situation before making any investment or planning decisions.