How Do Financial Advisors Make Money?

Everyone living in the U.S. interacts with the financial and tax system in some way - whether it's:

• Taking Out a Mortgage

• Investing Your Savings

• Buying Insurance

• Paying Your Taxes

  
  

We all rely on this complex system to achieve our goals - and the decisions we make have real consequences.

It's no surprise that many people turn to financial advisors for guidance.

But here's the issue: the financial services industry monetizes this demand in ways that are very different from other professions like law and accounting.

Most people don't really understand how their advisor gets paid or where conflicts of interest exist. This lack of transparency is often a $100,000+ issue over a lifetime.

Let's break down the 3 main financial advisor business models so you can see which one fits you.

1.) Commission-Based Advisor

Earns commissions selling financial products such as insurance, investments and annuities. They don't get paid for advice unless that advice leads you to buy what they are selling.

Financial planning here is often a sales tool, not the main service. This is a volume-driven business and financial planning is laborious.

Who benefits from a Commission-Based Advisor?

• You need a specific product (insurance, annuity, investment)

• Don't want to pay ongoing advisory fees

• Understand and accept the conflicts of interest

  
  

The commission-based advisor often gets a bad reputation for pushing unnecessary products and sometimes it's deserved. But a lot of these products have valid use cases depending on the situation. This negative reputation is really only deserved if the conflicts of interest are not clear and the product does not really match the client's needs.

2.) Assets Under Management (AUM) Advisor

Charges a fee based on the size of your investment portfolio - typically 1% per year.

Example, if you moved your $1M 401(k) to an AUM firm they would charge you $10,000 per year.

While these firms often include financial planning as part of the service, client's are paying for investment management.

One step further, this means that the firm's financial success is dependent on investment management, not financial planning.

This is an aggregate assets and scale business. Often, senior advisors focus on bringing in more assets while junior staff handles the day-to-day client work.

Who benefits from an AUM advisor?

• Have $5M+ in investments for the firm to manage

• Want to fully delegate investment management

• Believe their investment strategy justifies the asset-based fee

  
  

This model is often marketed as “better” than commission-based: “We do better when you do better” or “We’re fiduciaries.”

Sure, but why should the firm make more money just because the client saves more? Sounds more like a tax.

It can also create its own conflicts: they don’t benefit when you pay down debt, invest in real estate, fund a deferred comp plan, or self-manage investments. And yes — it can get very expensive.

3.) Flat-Fee Advisor

Charges a flat or hourly fee for financial planning advice - much like a CPA or attorney. Some include investment management in the fee; others are advice-only.

Since financial planning is the revenue generator, it typically is the focus - though at some firms it may come at the expense of complex investment strategies.

Who benefits from a Flat-Fee Advisor?

• Need advice beyond investing - tax planning, cash flow, retirement, deferred compensation, equity comp etc.

• Want ongoing guidance without paying an AUM fee

• Prefer a low-cost, passive investment strategy

• Interest in actively engaging with your personal finances

  
  

This is the least common model because it’s harder to scale, but it’s growing as more consumers want objective advice for a transparent fee that aligns more with the value provided to the client.

The potential downsides are that some firms may be smaller, have a large number of clients or have a limited scope of services. These downsides all stem from the challenge of scaling this model.

Final Thought

There’s no universal “best” model. The right fit depends on your needs, preferences, and asking the right questions.

​Taurus Financial Planning provides financial planning, tax strategy and investment guidance to high-earning professionals for a flat-fee.

No commissioned product sales. No asset-based fees. No asset minimums or pressure to move your accounts. Just thoughtful, unbiased guidance for a flat, transparent fee.

If you want to learn more about TFP's services and pricing, click the link below:

Services and Pricing

Thanks for reading,

Mark Chisenhall, CFA, MBA

Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.