What investors need to know about financial advisor fees

Core Insights - Understanding financial advisor compensation is crucial for consumers, with 36% unaware of how they pay for services and 20% believing services are free [1][2] Compensation Models - Advisor compensation is primarily categorized into commission-based and fee-based relationships [2] - Fee-based compensation can include various structures such as annual fees, monthly subscriptions, one-time consultations, or asset-based fees [3][4] Commissions - Commissions are one-time payments for selling specific financial products, with a decline from 23% of advisors in 2024 to an expected 16% in 2026 [5] - Pros include potentially lower costs for consumers needing specific product advice [6] - Cons involve conflicts of interest, where advisors may recommend products that yield higher commissions rather than optimal solutions [8] Assets Under Management (AUM) Fees - AUM fees are typically around 1% of assets managed, with 72% of advisors using this model in 2024, projected to rise to 78% in 2026 [9][10] - Pros include a common compensation structure, but cons include a focus on investment advice rather than comprehensive financial planning [11][12] Flat Dollar Fees - Flat fees provide predictability and align incentives between clients and advisors, but may be high for those with limited funds [13][15] - This model can exclude clients with fewer investable assets, as it may not be profitable for advisors to take them on [15] Subscription, Hourly, and Per-Engagement Fees - These models are straightforward and may be cost-effective for certain consumers, particularly those with less financial complexity [20] - However, accountability may be lower, and finding advisors who charge these fees can be challenging, with less than 1% of advisors using this model in 2024 [20]