Here's a question I'd ask anyone working with a financial advisor: how much did you pay them last year? In actual dollars. Not a percentage. Dollars.
If you can't answer that, it's usually not because you weren't paying attention. It's because the industry has several ways of getting paid, and some of them are built so the cost is real but the bill is invisible. So today I'm walking through all 4 compensation models, what each one costs in dollars, and the incentive or conflict each one creates. And stick around, because at the end I'll give you the 3 questions that surface any advisor's real price in a single meeting. Including mine.
Model 1 is commissions. A commission-based professional is paid when a transaction or a product sale happens. Often it's a markup, a spread, or compensation built into the product's pricing. Some products pay a one-time commission up front - others pay on a recurring basis like 12b-1 fees and annuity trails. Since the commission is baked into pricing, you may never write a check at all. That's exactly why it can feel free. The cost is real. It's just built in.
Commissions have a legitimate use case. If you want one transaction, a single bond, a term life policy, one block of stock, paying once can cost less than signing up for a fee you'll pay every year afterward. The incentive to watch: a commission-based salesperson is paid to transact, and some products pay more than others.
And there's a standards difference worth explaining as well. A broker's best-interest obligation generally applies at the moment of each recommendation. An investment adviser's fiduciary duty generally continues through the relationship. So after a commission product is sold, the practical question becomes: did anyone agree to keep watching your account?
The next model is more common, and the cost is almost never visible.
Model 2: the Assets Under Management or “AUM” fee, is a percentage of the assets the advisor manages for you. This is the industry's default, with roughly 92% of all advisors using this model. It's typically billed quarterly and deducted straight out of the account, and often no invoice ever lands in your inbox. As the portfolio grows or shrinks, so do the fees you pay.
Let’s take a hypothetical example where your advisor is charging 1% to manage your accounts. Real schedules are usually tiered and decline as assets rise, so treat this as an illustration. On a $1,000,000 portfolio, 1% is $10,000 a year. About $2,500 a quarter.
Here's what I've noticed. 1% sounds like a rounding error. $10,000 sounds like a used car, purchased every single year. Both describe the same fee. And because it's deducted right out of your account rather than invoiced, many clients don’t see the actual dollar amount because they don’t read their monthly investment statements.
And in a flat or down year, the fee still comes out of the account.
To be fair to the model: the fee usually bundles investment management, rebalancing, and financial planning into one price. There's no meter running when you call, and the alignment is partly real, because when your portfolio falls, the advisor's revenue falls with it.
The incentive to watch is that the fee is tied to the assets in the account. Advice that moves money out of the account, such as paying off the mortgage, gifting to your kids, leaving the 401(k) where it sits - all reduces the advisor's revenue. Plenty of AUM advisors give that advice anyway. The structure just means the recommendation and the paycheck point in opposite directions, and you should know that going in.
Model 3: the flat fee. A stated dollar amount for the year, billed annually, quarterly, or monthly, and often priced on complexity of your situation rather than account size. Full disclosure: this is how my firm charges, and our schedule is public. So weigh everything I say in this section knowing I have a side.
What flat fees get you is visibility. You see the number, you write the check or approve the bill, and the price doesn't change because the market had a good year. Your portfolio is not an invoice.
The incentive to watch runs the other direction: a flat-fee advisor is paid the same whether they do a lot or a little for you in a given year. So the question to ask is what's included, and how much attention you'll actually get.
Model 4: hourly. A stated rate for time spent on your questions, very similar to how most attorneys charge for their service. Genuinely useful for a one-time project or a second opinion. The incentives are the advisor's paid for hours, and you might hesitate to call because the meter's running.
Those are the 4 models. And one additional clarification on two common industry terms that sound like the same thing. You will often hear the terms “fee-only” and “fee-based”. They sound exactly the same. Fee-only means the advisor is paid only by clients, typically through AUM, flat fees, or hourly. Fee-based means the same advisory fees as fee-only, plus the ability to also earn commissions on products sold. “fee-based” is sometimes referred to as “hybrid” or “dual registration”. Just one word difference, but they can have material differences in conflict of interest.
Alright, the 3 questions I promised. Ask these in the first meeting, of any advisor, including me:
Question 1: in actual dollars, what will I pay you in the first year, all-in, including the expenses inside the investments themselves?
Question 2: are you fee-only or fee-based? Does anyone at your firm earn anything from the products you'll recommend to me?
Question 3: what exactly is included in that price, what costs extra?
A good advisor, on any model, has heard all 3 and answers without flinching. If you get some hesitation, that is also an answer.
Again, in full disclosure my firm charges a flat fee, so I have an opinion on this topic. Your circumstances can meaningfully change what structure fits best.
So here's the play. Find out which model you're paying today. Turn it into dollars for the last 12 months. Then decide, whether what you got was worth what you paid. Any answer is allowed.
In my experience, the fee conversation is only uncomfortable when someone at the table would rather not have it.
In the description below we’ve put our calculator to compare the differences in AUM vs flat fees. Input your portfolio size and see the comparison. And if you'd like to talk through what you find, click the link, tell us a little about your situation, and we'll set up some time.
Now, this video is educational and general in nature. It is not investment, tax, or legal advice. The fee figures used here are hypothetical, actual fees vary by firm and schedule. Your circumstances can meaningfully change what fits best.