Financial Advisor Compensation – Why it Matters

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A financial advisor can be a great tool to better manage your investments. Make sure you know how they're compensated and that they'll fit your needs.

The following is a contribution from my good friend Roger at The Chicago Financial Planner. If you’re interested in contributing to Frugal Rules, please consult our guidelines and contact us.

If you are looking for a financial advisor to help you with financial planning, investments, or any other aspect of your financial life you have a lot to consider.  In my opinion, it is vital that you understand how the advisor is paid. All too often the source of the financial advisor’s compensation can cause a conflict of interest impacting their recommendations to you.

The three main types of financial advisor compensation are commissions, fee-based, and fee-only. Here’s a little more about each one of them.

Commissions: The advisor is compensated for the sale of investments, insurance, or other financial products. Compensation is paid by the firm that provides the financial product, usually a mutual fund or an insurance company. This may be in the form of an up-front charge, trailing (ongoing) fees or a combination of both.

Fee-based: Typically the advisor will charge a fee for putting together a financial plan for you. If you choose to implement the recommendations in the plan, such as the purchase of insurance, an annuity, or investments, the implementation will typically be done via the sale of commissioned products.

Fee-based is the most confusing form of compensation. It is basically a variation of the commission model, though it is often confused with fee-only. In my opinion financial services firms and reps operating under this model do nothing to remove this confusion.

Fee-only: The advisor charges a fee for the services rendered. This can be a one-time fee or an ongoing fee based upon the nature of your relationship and the services rendered.

Fees may be hourly, flat or retainer based, or based upon a percentage of the assets under advisement. The advisor accepts no compensation of any type from the sale of financial products; this inherent conflict of interest is eliminated.

When the advisor is compensated all or in part through the sale of financial products, clients are always left to wonder if the advisor’s recommendations are based on what is best for them or if the compensation received from the product sale influences their recommendations.

As you have probably surmised, I am a fee-only financial advisor who freely admits his bias. I am also a member of NAPFA the largest professional organization of fee-only advisors in the country.

If you are looking for a financial advisor, you can check out the “find an advisor” area on the front page of the site to find a fee-only advisor near you.  Here is a link to NAPFA’s excellent Pursuit of a Financial Advisor guide.

The Garrett Planning Network is another organization of fee-only planners, many of whom focus on providing hourly, as-needed advice.  Many Garrett planners are members of NAPFA as well.

Certainly compensation-style is not the only metric for evaluating a financial advisor.  A few other things to consider:


  • Does the advisor normally work with clients whose situation is similar to yours?  For example if you are a 35 year-old parent with two young children, an advisor who focuses on clients who are in or near retirement and have at least $1 million to invest might not be the right advisor for you.
  • What are the advisor’s qualifications? Is he/she a CFP® or a PFS (the CPA designation for financial planning)?  How long have they been in the business? What is their educational background?  Also, check their record for any violations at the FINRA Broker Check site for SEC and state-registered advisors and firms, BrightScope which is a private service, or the CFP Board of Standards if the advisor is a CFP®.   All of these are free of charge.
  • When you go to the grocery store, it’s always better to have a list. Similarly, it’s a good idea to know what type of help you are seeking before contacting an advisor. Are you looking for a one-time review of your situation or ongoing help with your investments and your overall financial planning needs? Are you seeking help with a very specific financial question or problem?

A financial advisor can be a great tool to better manage your investments. Make sure you know how they're compensated and that they'll fit your needs.

The right financial advisor can be a real asset to you and your family as you strive to meet your various financial goals such as funding a college education for your kids and a comfortable retirement for yourself. Finding the right advisor takes some work, but it is ultimately worth it.

Have you ever used a Financial Advisor, or do you see the need of hiring one in the future? What do you think is the most important aspect is in hiring a financial advisor?


Editor’s note: I am so thankful for Roger’s insight. A financial advisor can be a great resource to help you manage your investment portfolio, but not every advisor will fit your needs. If you’re interested in hiring an advisor I encourage you to check out some of the resources Roger mentioned in order to help you find an advisor that’ll best fit with your overall investment goals.

Roger Wohlner, CFP® is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Check out Roger’s popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.

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John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.


  • Definitely a good thing to keep in mind when shopping for a financial adviser. It may be a few years before I seek one out, but I will definitely keep these things in mind. Thanks for sharing, Roger!

  • Love this, John! It’s so nice to have a clear pic of how the advisors work and what to look for to fit our individual needs. Thanks!

  • Great explanation of the different ways an advisor gets paid. The thing I don’t understand is how there is no conflict of interest with a commissions based advisor. They are supposed to do the right thing for you, the client. But that might be the worst thing for their own wallet. It’s certainly a gray area and would leave me questioning every decision or recommendation he would present to me.

  • pauline says:

    Interesting check list Roger. I have a few free financial advisors, namely cousins and uncle who do the job so far and I think I would always question a third party’s motives. But the family gets emotional too, no solution is completely ideal, you shouldn’t rely only on yourself and try to have a fresh pair of eyes look over your plans.

  • We have never been to an advisor but would like to do a one-time checkup in the next couple years. We would definitely need to find an advisor who works with 20/30-something couples with modest incomes (rare?).

  • I have not sought out a financial advisor but I probably should. Thanks for the advice. I think it’s harder to find the right person in a smaller town, like where we live. Some of the ones I’ve met here I wouldn’t trust for very much. I think financial planning came as a whim or way to make money without much knowledge.

  • This is great info to know. Financial advisors have to be paid somehow and it’s important to understand what fees you are paying. We have never used an advisor before and I’m not sure I would want to pay someone for advice…but that’s just me.

  • My Financial Independence Journey says:

    I don’t have a financial adviser, and am probably not interested. I like doing my own investing. If I was going to do a jump to early retirement I might consult a financial adviser, just to get a second opinion on my numbers.

    To be fair, I have relatives who hate financial stuff. They have no problem saving money or living below their means, but for some reason investments scare them and they don’t want to take the time to learn about investing at all. For them, a financial adviser has been helpful in getting them to invest their money and trying to make sure that they’re on track for retirement.

    I think it’s important to find a financial adviser who has worked with a variety of clients with varying needs and wants. And who comes well recommended.

  • Great breakdown of something we don’t often think about. Great post!

  • I worked with the bank’s financial advisor when I first started investing. I was such a bad experience that I avoided financial advisors ever since. I think working with a fee only advisor is a great way to come up with a financial plan or review it. That’s what I would go with when I need help.

  • I definitely like the fee-only approach. I don’t like feeling like I am being pushed into certain products that are more beneficial for the advisor than for me.

  • Jim says:

    Great post Roger, I am a fan of the fee only advisor who isn’t encouraged to make recommendations based on the highest commission they could receive. That to me seems like a conflict of interest. Very educational thanks!

  • Jose says:

    Wow, my experience with financial planners has been limited to stock brokers, so really don’t have much experience. The one that I do have some experiences with (they manage some of the financial aspects of a friends practice) are so conservative that you can earn more money in a money market. I should probably sit down with with one (who would have a heart attack at learning of my investment strategies). I want to make sure that if I do, that it’s one that doesn’t manage my account on a commission, or a fee based one.

  • Justin@TheFrugalPath says:

    I’m a big fan of fee based advisers. Paying based on commission makes me feel like the adviser is more focused on selling me something to pad their pockets. I know there are great commission based advisers and horrible fee based ones, but somehow I feel the odds are in my favor going the fee based route.

  • Helpful tips. We don’t have a financial advisor (not enough money to need advice, yet), but at some point I suspect we’d need/want a little help. It’s good to know the biases associated with advisors based on their pay structure. I have no problem paying a fee (it’s a service afterall), I just want to know what I’m paying for and how the commission may impact the advisor trying to sell the product.

  • I am actually looking to become a financial advisor and this article was very helpful! Thank you for the insight of the business model for financial advisors. I would agree that selling financial products in which you are compensated by the company that provides them is indeed a conflict of interest.

  • This was a great breakdown of the differences Roger! I’ve had experience with fee-only and commission based financial planners. I was very uncomfortable with the commission based planner because I felt all he was trying to do was scare me into buying his insurance products that I was not interested in. The fee-only advisor seemed more willing to listen to our needs and match investments accordingly.

  • If I ever went to a financial advisor it’d be fee-only for sure. But since I like being hands on with my finances I don’t think that’s ever going to happen unless I happen to luck in to some exorbitant sum of money. Although even then I’d probably just slap it into a bunch of mutual funds and live off the payouts from them.

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