Squirrelfishes and soldierfishes (Holocentridae) are among the most conspicuous species in the nocturnal reef fish community. However, there is no clear consensus regarding their evolutionary relationships, which is reflected in a complicated taxonomic history. We collected DNA sequence data from multiple single copy nuclear genes and one mitochondrial gene sampled from over fifty percent of the recognized holocentrid species and infer the first species-level phylogeny of the Holocentridae. Our results strongly support the monophyly of the clades Myripristinae (soldierfishes) and Holocentrinae (squirrelfishes). The molecular phylogenies differ with regard to previous hypotheses of relationships within the Myriprisitinae, resolving a clade of cryptic reef associated and deep water non-reef dwelling lineages (Corniger+. Plectrypops+. Ostichthys) that is the sister lineage to a monophyletic Myripristis. Within Holocentrinae, Neoniphon and Sargocentron are strongly supported as paraphyletic, while Holocentrus is nested within Sargocentron. Using Bayesian ancestral state reconstruction methods, we demonstrate the taxonomically diagnostic characters for Neoniphon and Sargocentron likely represent character states with a complex evolutionary history that is not reflective of shared common ancestry. We propose a new classification for Holocentrinae, recognizing four lineages that are treated as genera: Sargocentron Fowler, 1904, Holocentrus Scopoli, 1777, Flameo Jordan and Evermann, 1898, and Neoniphon Castelnau, 1875.