By CJ Burnett, CExP™
Most people misunderstand how financial advisors make money. Sometimes the lack of clarity can cause people to not seek professional help and people avoid looking for an advisor to guide them long enough that bad financial decisions are made and regret is a byproduct.
The title “financial advisor” sounds official, but it isn’t a regulated term in the way most people assume. Registered Representative and Investment advisor representative (Financial Advisors) are subjected to the rules and oversight of the SEC and FINRA.
However, those who never get formally registered are generally not subject to direct oversight. Two people could use the same title while operating under completely different rules, compensation structures, and incentives.
If you don’t understand those differences, it’s hard to know whether advice is aligned with your goals or with someone else’s paycheck.
At the highest regulatory level are fee-based investment advisors. These are advisors who are legally recognized as Investment Advisor Representatives and work under Registered Investment Advisors. In most jurisdictions they are required to hold Series 7 and Series 66 licenses, which permits them to give investment advice, manage portfolios, and charge an ongoing fee based on the amount of money they manage.
I have found the standard industry fee is about one percent per year. That means if someone manages a million dollars for you, they typically earn about ten thousand dollars annually. If the portfolio grows, their compensation grows with it. If it shrinks, they earn less.
This model is often described as aligned, because the advisor benefits when the client’s portfolio grows. But alignment doesn’t automatically mean value. Over long periods of time, even a one percent fee has a real impact if they aren’t constructing a portfolio that would outperform the fee drag.
When you run the math across decades, the difference between paying that fee and not paying it can easily amount to hundreds of thousands of dollars. That doesn’t mean the fee is wrong. It means it needs to be earned.
If all an advisor does is place money into basic investments and walk away, the math works against the client. Based on my experience that’s usually what happens. People sometimes go years without hearing from their advisor.
These advisors may also be able to charge an hourly fee or a flat fee for their time and advice. They can charge fees to put a plan together and once it’s complete the client doesn’t pay them anything else if that advisor isn’t managing an investment account for them.
The second category of advisors operates under a different license entirely. These individuals typically hold a Series 6 license and, possibly, a 63. Under regulation best interest they generally should not hold themselves out as an advisor. They cannot charge an ongoing management fee, and they cannot trade individual stocks or bonds.
Instead, they sell packaged products like mutual funds and annuities – and earn commissions when those products are purchased. The commission is usually around five and a half to six percent upfront, followed by a small ongoing trail of about a quarter of a percent each year.
What’s interesting is that over short periods of time, commission-based models can be cheaper than a one percent annual fee. It usually takes around seven years before a fee-based model becomes more expensive. After that point, the fee-based structure costs more every year.
Again, cheaper does not automatically mean better. What matters is what you’re getting in return. Advice, planning, behavioral coaching, and oversight all have value. Products alone do not create outcomes.
The third category is insurance-only advisors. These representatives do not offer investments at all. And under the eyes of the SEC, anyone associated with a broker dealer who is not property registered as an investment advisor representative should not be using the title Advisor.
They are licensed at the state level to sell insurance products like life insurance, disability insurance, health insurance, and long-term care insurance. In Florida, for example, this is done under a 2-15 license. Their compensation comes directly from insurance companies, often in the form of first-year commissions and sometimes get renewals for as long as you have that policy in force.
On a policy with a thousand-dollar annual premium, commissions can range from five hundred to twelve hundred dollars in the first year, with smaller ongoing payments in future years called “renewals.”
The important thing to understand here is regulation.
Investment advisors are regulated by the SEC and FINRA. Insurance advisors are regulated by state insurance departments and industry groups like LIMRA. These systems do not talk to each other. That separation has allowed certain insurance products with investment-like features to avoid the disclosure standards required in traditional investing.
In recent years, that gap has led to major lawsuits against insurance companies for misleading clients. The issue isn’t insurance itself. The issue is when products blur lines without clear accountability and disclosures.
Annuities sit right in the middle of that conversation. At their core, annuities are insurance tools designed to create guaranteed income for life. You give an insurance company a lump sum, and in return they promise to pay you a certain amount every year for as long as you live. In many ways, I find that annuities are a modern version of pensions, which most people no longer have.
That guarantee comes at a cost. Many annuities carry internal fees of three to four percent per year. Over time, those fees are significant.
In most cases, annuities are not designed to preserve wealth or leave money to heirs. They are designed to convert assets into income. If guaranteed income is the primary goal, high fees can be acceptable. If legacy or long-term growth is the goal, annuities are usually the wrong tool.
In my experience, one of the biggest mistakes people make is looking for simple answers. Is this product good or bad? Is this advisor right or wrong? That kind of thinking almost always leads to trouble. Every financial product has situations where it makes sense and situations where it doesn’t. The same is true for compensation models. The key is understanding what problem you’re trying to solve.
This becomes especially important when we talk about retirement. Retirement isn’t an age, and it isn’t building to a particular amount of assets on your balance sheet. Retirement is the ability to stop working permanently because your assets produce enough income to support your lifestyle for the rest of your life.
Some people reach that point and keep working anyway, because they enjoy what they do. Others retire early and redirect their time toward learning, service, or causes they care deeply about.
What money doesn’t do is change who you are. It reveals what’s already there. I’ve worked with people who have more money than they could ever spend and still feel anxious and unfulfilled. Financial planning eventually becomes a conversation about values, purpose, and peace—not just returns and products.
For many people of faith, those conversations naturally expand into questions about generosity, stewardship, and giving. Money is a tool. It’s meant to support life, not replace meaning.
Obedience, generosity, and alignment don’t come from trying to earn something. They come from understanding what you’re building your life around in the first place.
Understanding how advisors work and how they’re paid doesn’t make you cynical. It makes you informed. And informed decisions tend to age a lot better than blind trust.
If you know how the system works, you can ask better questions, spot misalignment earlier, and choose strategies that support the life you’re trying to live.
This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Tom is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. Florida Veterinary Advisors and The Next Step Planning Group are not an affiliate or subsidiary of PAS or Guardian. California Insurance License #0K80141. AR Insurance License #15823672. Florida Veterinary Advisors is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. The individuals associated with Florida Veterinary Advisors do not maintain specialized licenses or qualifications for the financial services provided to veterinary professionals. 7989827.1 Exp 5/27