What Commissions Do Financial Advisors Earn?

Financial advisor commission structures vary widely, reflecting the diversity of services and compensation models within the industry. Many advisors earn commissions based on the financial products they sell, such as mutual funds, insurance policies or annuities. In these cases, advisors typically receive a percentage of the sale, incentivizing them to recommend specific products. Other advisors may follow a fee-only model, charging clients a flat fee or a percentage of assets under management instead of earning commissions on transactions. Understanding the differences in these commission structures can help consumers make informed decisions when selecting an advisor.

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Understanding Financial Advisor Commissions

While some financial advisors take commissions when their client simply opens an account, others earn them from selling you a specific financial product. In that case, the advisor gets paid by the company, such as an insurance company, that issues the product.

There are several ways in which an advisor can receive their commission. These can include upfront sales fees, loads on mutual funds, commissions from annuities or other insurance products, annuity surrender charges or trailing commissions, in which the client pays a fee for each year they own an investment.

To protect consumers, there are rules and standards that financial advisors must follow. If an advisor is registered with the SEC or a state regulatory entity, they are likely a licensed fiduciary. In this case, they must, by law, prioritize your interests before their own and avoid any conflicts of interest when recommending products.

What Is a Fee-Based Advisor?

However, some advisors follow what’s called a fee-based model. This means they receive client-paid fees for the advisory services they provide, as well as compensation for selling third-party products, like insurance and securities. As a result, fee-based advisors act both as fiduciaries and sales representatives. This is where things can get murky, because fee-based advisors must follow separate professional standards related to each role.

Previously, representatives of broker-dealers were held to the a less stringent standard than fiduciaries. Known as the suitability standard, this rule required these advisors to make recommendations that were “suitable” for the client based on their financial profile. However, the suitability standard did not require advisors to prioritize the client’s best interest over their own, meaning an advisor could recommend a higher-fee product as long as it meets the suitability criteria, potentially creating conflicts of interest.

That’s changed since the Securities and Exchange Commission (SEC) rolled out Regulation Best Interest (Reg BI), established by the SEC in 2020, raising the standard for brokers and advisors by requiring them to act in the best interest of their retail clients. Under Reg BI, advisors must disclose conflicts, consider costs and avoid incentives that may compromise their objectivity. However, some critics have argued that Reg BI hasn’t gone far enough to protect consumers.

What Are the Sources of Financial Advisor Commissions?

Financial advisors can receive commissions from a range of investment products. These commissions usually come in the form of a percentage of the sale value of the product. Commission-based arrangements are often based on some relationship an advisor has with a company, which is why they can sometimes cause concerns with conflicts of interest.

Here’s a breakdown of some common areas in the financial services industry where you’ll run into commissions:

Insurance products: There can be big incentives associated with selling insurance products. Some advisors may see commissions as high as 70% of the first year’s premium. After that, they may receive an additional 3% to 5% of the premium per year as long as the policy is active.
Mutual funds: Typically, advisors making commissions on mutual funds get paid via a trailer fee. This commission can range from 0.25% to 1% of the assets invested in the fund on an annual basis. The advisor may receive this fee as long as the investment remains in the mutual fund.
Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 8% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a commission between 6% and 8%, according to Annuity.org.

The Case Against Commission-Based Advisors

There are a few disadvantages to working with a commission-based financial advisor. For one, there’s always the worry that they may recommend you purchase a product because it benefits them financially. For instance, it might not be suitable for your risk tolerance or financial goals. If your financial advisor relies solely on commissions to make a living, this may put your best interests in jeopardy.

Since these advisors receive a one-time commission for the sale, they may not offer the same long-term attention that you might want for your finances. So unless you’re buying a product that doesn’t require regular transactions, you may want to find an advisor who’s amenable to maintaining an ongoing dialogue with you.

Also of note: Financial advisors who work for investment brokers or insurance agencies are often more concerned with sales. So while they may abide by the suitability or even fiduciary standard, their allegiance may be to their employer’s bottom line.

One good thing to remember, though, is that many registered financial advisors don’t receive payment from commissions alone. Beyond that, if an advisor has a certification or designation, they may have an independent fee structure. Additionally, SEC- or state-registered advisors must abide by fiduciary duty, putting your interests above all else in the process.

Bottom Line

Like any financial decision you make, do your research before deciding on a financial advisor. If you’re simply buying a one-time annuity policy from a commission-based advisor, that might be fine with you. But if you’re looking for a comprehensive financial advisor service that will be with you for the long-term, a fee-only advisor may be the best way to go.

Tips for Finding a Financial Advisor

If you don’t already have one, finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As your consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
Worried about the costs of hiring a financial advisor? Consider using a robo-advisor instead. Robo-advisors typically require less investments and charge lower fees, making them a better option for people with less money to invest.

Next Steps

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