How financial advisors get paid
Fee-only, fee-based, commission, and assets under management. The differences are small in wording and large in effect.
Compensation is the most useful thing to understand about any financial professional, because it explains which recommendations are easy for them to make and which are expensive.
Assets under management
A percentage of the money managed, commonly around 1% a year and typically lower at higher balances. Predictable and easy to compare. Worth noting that advice which reduces the managed balance — paying off a mortgage, buying an annuity, holding more cash — also reduces the fee. That is a conflict to be aware of, not a reason for suspicion.
Flat fee or hourly
A set amount for a plan, or an hourly rate for advice. Useful when you want a specific question answered rather than ongoing management, and the cost does not scale with your balance.
Commission
Payment from the product provider when you buy. The advice can still be sound, but the incentive points toward products that pay, and toward transacting rather than waiting.
"Fee-only" versus "fee-based"
These sound like synonyms and are not. Fee-only means compensation comes solely from clients. Fee-based means a mix of client fees and commissions. One word apart, materially different.
Reading the answer
The question that cuts through it: "Other than what I pay you directly, does anyone else pay you anything in connection with my account?" Everything relevant is disclosed in the firm’s Form ADV Part 2A, which you can read before a first meeting.
This guide is general information, not financial, insurance, tax, or legal advice. Rules vary by state and by individual circumstance. Speak to a licensed professional about your own situation.