Hermaphroditism is taxonomically widespread among teleost fishes and takes on many forms including simultaneous, protogynous, and protandrous hermaphroditism, bidirectional sex change, and androdioecy. The proximate mechanisms that influence the timing, incidence, and forms of hermaphroditism in fishes are supported by numerous theoretical and empirical studies on their mating systems and sexual patterns, but few have examined aspects of sex-allocation theory or the evolution of hermaphroditism for this group within a strict phylogenetic context. Fortunately, species-level phylogenetic reconstructions of the evolutionary history of many lineages of fishes have emerged, providing opportunities for understanding fine-scale evolutionary pathways and transformations of sex allocation. Examinations of several families of fishes with adequate data on phylogeny, patterns of sex allocation, mating systems, and with some form of hermaphroditism reveal that the evolution and expression of protogyny and other forms of sex allocation show little evidence of phylogenetic inertia within specific lineages but rather are associated with particular mating systems in accordance with prevalent theories about sex allocation. Transformations from protogyny to gonochorism in groupers (Epinephelidae), seabasses (Serranidae), and wrasses and parrotfishes (Labridae) are associated with equivalent transformations in the structure of mating groups from spawning of pairs to group spawning and related increases in sperm competition. Similarly, patterns of protandry, androdioecy, simultaneous hermaphroditism, and bidirectional sex change in other lineages (Aulopiformes, Gobiidae, and Pomacentridae) match well with particular mating systems in accordance with sex-allocation theory. Unlike other animals and plants, we did not find evidence that transitions between hermaphroditism and gonochorism required functional intermediates. Two instances in which our general conclusions might not hold include the expression of protandry in the Sparidae and the distribution of simultaneous hermaphroditism. In the Sparidae, the association of hypothesized mating systems and patterns of sex allocation were not always consistent with the size-advantage model (SAM), in that certain protandric sparids show evidence of intense sperm competition that should favor the expression of gonochorism. In the other case, simultaneous hermaphroditism does not occur in some groups of monogamous fishes, which are similar in ecology to the hermaphroditic serranines, suggesting that this form of sex allocation may be more limited by phylogenetic inertia. Overall, this work strongly supports sexual lability within teleost fishes and confirms evolutionary theories of sex allocation in this group of vertebrates.