Only a professional who receives no sales-related compensation may call the compensation method "fee-only" under CFP Board's code; "fee-based" means fees and commissions (CFP Board, Code of Ethics and Standards of Conduct, checked October 14, 2026). On $1,000,000, a 1% fee is $10,000 a year.
Three ways advisors are paid, in plain words
Advisors are paid in three basic ways, and the labels sound alike.
- Fee-only: paid only by you. No commissions from any product. CFP Board allows a CFP professional to use the term "fee-only" only if neither the professional, the firm nor related parties receive sales-related compensation (CFP Board, Code of Ethics and Standards of Conduct, checked October 14, 2026).
- Fee-based: fees plus, possibly, commissions. CFP Board says anyone using "fee-based" may not suggest it means fee-only and must clearly state that they earn fees and commissions or are not fee-only; CFP Board itself calls this model "fee and commission" (same source).
- Commission: paid when a product is sold. A broker is typically paid "a commission or markup every time you buy or sell an investment" (Investor.gov, Brokers, checked October 14, 2026). An annuity agent is usually paid a commission by the insurer, and must describe that compensation before the sale (NAIC Model Regulation 275, Section 6.A(2), 2020).
CFP Board's definitions bind only CFP professionals. Anyone else may use these words more loosely, so ask what they mean in writing.
The percentage fee: arithmetic on $1,000,000
Most advisory firms charge a percentage of the assets they manage, called an assets under management (AUM) fee. The SEC notes the adviser's fee "is typically based on the value of all of the assets held in your account" (Investor.gov, Investment Advisers, checked October 14, 2026).
The arithmetic is simple. A 1% fee on $1,000,000 is $10,000 a year. On $3,000,000 it is $30,000. The fee is charged in good years and bad years, and usually comes out of the account itself.
The larger cost is what that money would have earned. The SEC's own example: $100,000 growing 4% a year for 20 years ends near $208,000 with a 0.25% annual fee, $198,000 with 0.50%, and $179,000 with 1.00% (Investor.gov, Understanding Fees, checked October 14, 2026).
A firm's brochure must show its fee schedule, say whether fees are negotiable, explain whether fees are deducted or billed, and list other costs such as custodian fees and fund expenses (SEC, Form ADV Part 2, Item 5, checked October 14, 2026). Fund expenses are paid on top of the advisory fee.
Flat-fee and hourly planners
Some planners charge a flat fee, a yearly retainer, or an hourly rate, with no link to your account size. The SEC's forms name "an hourly or flat fee" and "fixed fees" as fee types alongside asset-based fees (SEC, Form ADV Part 2, Item 6; SEC, Form CRS Instructions, Item 3.A).
For a household with $300,000 to $10 million, a flat or hourly fee can cost less than a percentage fee as balances grow, because the price does not rise with the portfolio. The trade-off is that you may carry out the trades and the monitoring yourself, unless monitoring is part of the agreement.
The conflict in each model, stated fairly
Every pay model creates an incentive. The SEC requires firms to name theirs in the relationship summary (SEC, Form CRS Instructions, checked October 14, 2026).
- Asset-based fees: the SEC's own example is that "the more assets there are in a retail investor's advisory account, the more a retail investor will pay in fees," giving the firm "an incentive to encourage the retail investor to increase the assets" (same source). That can tilt advice on paying off a mortgage, buying an annuity, or spending down savings.
- Commissions: the SEC's example for brokers is an incentive "to encourage a retail investor to trade often" (same source). Product commissions can also differ by product. In fairness, a single commission on a one-time purchase you plan to hold can cost less than years of percentage fees.
- Fee-based (both): an adviser whose people also earn commissions must say this "presents a conflict of interest," must disclose if commissions are more than 50% of its advisory-client revenue, and must say whether advisory fees are reduced to offset commissions (SEC, Form ADV Part 2, Item 5.E).
- Flat and hourly: fewer product and asset incentives, though hourly billing rewards more hours.
No model is conflict-free. Fee-only removes product commissions; it does not remove the asset incentive.
How to see what you actually pay
Start with the firm's Form CRS, which must use the heading "What fees will I pay?" and must include this question for you to ask: "If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?" (SEC, Form CRS Instructions, Item 3.A). Then read Item 5 of the Form ADV Part 2 brochure. Both are free at Investor.gov/CRS.
For the questions to bring to an existing advisor, see asking your AUM advisor about fees. For what each fiduciary standard requires, see Fiduciary, decoded.
A plain example with numbers: $1,000,000 over 20 years
Hypothetical: $1,000,000 invested for 20 years at an assumed 6% gross return a year, with no withdrawals and no taxes. For simplicity, each fee is subtracted from the return every year.
| Annual fee | Net return assumed | Year-one fee | Value after 20 years | Less than with no fee |
|---|---|---|---|---|
| 0% (no advisory fee) | 6.0% | $0 | $3,207,135 | $0 |
| 0.5% | 5.5% | $5,000 | $2,917,757 | $289,378 |
| 1.0% | 5.0% | $10,000 | $2,653,298 | $553,838 |
| 1.5% | 4.5% | $15,000 | $2,411,714 | $795,421 |
The arithmetic for the 1% row: $1,000,000 × 1.05 to the 20th power = $1,000,000 × 2.6533 = $2,653,298. With no fee, $1,000,000 × 1.06 to the 20th power is $3,207,135. The gap of $553,838 is the fees paid plus the growth those fees would have earned.
The 6% return is an assumption, not a forecast. Real fee schedules are often tiered and charged on the balance, so actual results differ. The point is the shape: each half point of yearly fee costs roughly a quarter of a million dollars on this hypothetical account over 20 years.
Red flags
- "Fee-based" used as if it meant fee-only, with no mention that commissions are also paid.
- "It costs you nothing" about a product whose commission is paid by the insurer or fund company.
- A percentage fee quoted without a dollar figure for your account.
- No mention of fund expenses or custodian fees on top of the advisory fee.
- Advice to move money you planned to use, such as a mortgage payoff fund, into the managed account without a written comparison.
- A fee-based account that also earns commissions, with no statement of whether the advisory fee is reduced to offset them.
- A brochure that shows commissions are the firm's primary compensation while the salesperson calls the firm fee-only.
- Frequent trading in a commission account with no clear reason for each trade.
- A fee schedule described as "standard" when the brochure says fees are negotiable.
- An annuity or insurance product recommended inside a fee relationship with no disclosure of the separate commission.
Questions to ask before you sign
- Are you fee-only, fee-based or commission-paid, and will you put that in writing?
- What will I pay in dollars this year for my account, including fund expenses and custodian fees?
- If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?
- Is your fee negotiable, and is it tiered at higher balances?
- Do you or anyone at your firm receive commissions on anything you might recommend to me?
- If you earn commissions, do you reduce your advisory fee to offset them?
- How would you be paid if I paid off my mortgage, bought an annuity or kept money at my bank instead?
- Do you offer flat-fee or hourly advice, and what would that cost for my situation?
- Is your fee deducted from my account or billed to me, and how often?
- Where in your Form CRS and Form ADV Part 2 brochure can I read all of this?
Read This Before You Sign
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Sources
- CFP Board: Code of Ethics and Standards of Conduct, duties when representing compensation method (checked October 14, 2026)
- Investor.gov: Understanding Fees (checked October 14, 2026)
- Investor.gov: Investment Advisers (checked October 14, 2026)
- Investor.gov: Brokers (checked October 14, 2026)
- SEC: Form ADV Part 2 instructions, Item 5 Fees and Compensation (checked October 14, 2026)
- SEC: Form CRS instructions (checked October 14, 2026)
- Investor.gov: Investor.gov/CRS search tool (checked October 14, 2026)
- NAIC: Suitability in Annuity Transactions Model Regulation 275 (2020)
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