How Financial Advisors Get Paid and Why It Matters

Most people assume all financial advisors work the same way. They don’t. One of the biggest differences exists behind the scenes: how an advisor gets paid. Compensation affects potential conflicts of interest, the advice you receive, and the legal duty the advisor owes you. If you are comparing advisors or considering a change, understanding these differences matters.

In the U.S., advisors typically fall into three compensation models: fee-only, fee-based, and commission-based. The terms sound similar, but they mean very different things for consumers.

Fee-only advisors

A fee-only advisor receives compensation solely from the client. That may include a flat planning fee, an hourly fee, a subscription fee, or a percentage of assets under management. The key point is what does not happen: Fee-only advisors do not earn commissions from investment products or insurance sales.

For consumers, this structure is generally viewed as easier to understand. You pay the advisor directly, and no third party compensates them for recommendations. Many fee-only advisors register as investment adviser representatives and operate under a fiduciary standard. That means they must put the client’s interests ahead of their own when providing advice, disclose conflicts, and seek best execution.

The Securities and Exchange Commission (SEC) emphasizes that registered investment advisers owe clients a fiduciary duty that includes both a duty of care and a duty of loyalty. In practice, that means advice should align with your goals, risk tolerance, and full financial picture, not with a product payout.

Fee-only does not automatically mean “better,” but it does reduce certain incentives that can influence recommendations. Like all compensation models, it has benefits and limitations depending on a client’s needs.  For investors who want ongoing planning and portfolio management, this clarity may be appealing.

Fee-based advisors

Fee-based can be a bit confusing. A fee-based advisor may charge planning or asset-based fees, but can also earn commissions from selling certain products, such as insurance or annuities.

From a consumer’s perspective, this hybrid model requires closer scrutiny. Some recommendations may fall under a fiduciary obligation, while others may follow a different standard depending on the advisor’s role at the time. Advisors who are both registered investment advisers and licensed insurance agents often switch “hats” depending on the service they provide.

Regulators allow this structure, but they require disclosure. The SEC and FINRA both stress that investors should understand when an advisor is acting as a fiduciary and when they are acting as a broker or insurance agent.

This does not mean fee-based advice is inherently flawed.  As with other models, the suitability of this approach depends on a client’s circumstances and preferences. It does mean consumers need to ask direct questions about how recommendations get compensated and whether lower-cost or alternative solutions exist. Without those conversations, it can be hard to evaluate whether a recommendation serves your best interest or simply meets a suitability threshold.

Commission-based advisors

Commission-based advisors earn income primarily through the sale of financial products. That may include mutual funds with sales loads, annuities, life insurance, or other investment products. You may not write a check directly, but you still pay through commissions embedded in the product.

These advisors typically operate under a suitability standard rather than a fiduciary standard. Suitability means the product must be appropriate for your situation, not necessarily the best or lowest-cost option available. While recent regulations, including Regulation Best Interest, raised expectations for broker-dealers, the legal duty still differs from a full fiduciary obligation .

For consumers, this model can make costs harder to spot. Commissions may feel invisible, but they can affect long-term returns. The model also creates built-in incentives to recommend products that pay higher commissions, even when comparable alternatives exist. However, it may be appropriate for investors with limited or transaction-specific needs.

Commission-based relationships often focus more on transactions than comprehensive planning. That can work for some investors, especially those with limited needs, but it may fall short for households approaching retirement with complex tax, estate, and income planning decisions.

Why compensation affects duty of care

How an advisor gets paid influences how the law views their responsibilities. Fiduciary advisors must place your interests first and manage conflicts transparently. Advisors operating under suitability or best-interest standards must recommend appropriate products, but they are not always required to prioritize the client’s outcome over their personal compensation.

That distinction matters most during major life transitions, such as retirement, a business sale, or an inheritance. At those moments, advice often spans investments, taxes, insurance, and estate planning. Understanding the advisor’s compensation model helps you evaluate whether recommendations align with your goals or with a sales incentive.

CFP Board, which owns the CERTIFIED FINANCIAL PLANNER® certification program in the U.S.,  and the SEC both encourage investors to ask clear questions about compensation, conflicts, and standards of care before engaging an advisor. Those conversations can feel uncomfortable, but they are an essential part of due diligence.

How to compare advisors more effectively

Compensation is only one piece of the puzzle. Experience, planning philosophy, communication style, and coordination with tax and estate professionals all matter. Comparing advisors based on a single factor rarely tells the full story.

That is why Savant created our Financial Advisor Evaluation Checklist. The checklist allows you to compare up to three advisors across 10 key financial planning areas and includes practical questions to ask during introductory meetings. It helps you move beyond titles and marketing language to focus on how an advisor actually works and how they get paid.

Financial Advisor Evaluation Checklist

If you are evaluating advisors or considering a second opinion, download the checklist and use it as a structured guide for your conversations. The right questions can reveal far more than a sales pitch ever will.

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This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.