Should you hire an advisor who charges an AUM-based fee or Flat-fee?

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Financial advisors provide financial advice and assistance to individuals and businesses. They can help you with a wide range of financial matters, such as saving for retirement, creating a budget, investing in stocks or other assets, and planning for significant life events like buying a home or paying for a child's education. They can also help on tax matters, manage debt, or devise an estate plan. There are several types of financial advisors like Registered Investment Advisors (RIAs), broker-dealers, insurance agents, bank financial advisors, etc., and you can hire anyone depending on your goals and needs. Financial advisors can also be categorized per their fee model. A financial advisor can charge you in different formats, such as a flat fee, an hourly fee, or a commission based on the assets the professional manages (Assets Under Management or AUM), etc.

The flat fee and AUM-based fee are two of the most commonly used fee methods used by financial advisors. Both of those models have their pros and cons. Therefore, if you wish to  know how each of these fee methods work, the difference between asset-based and fee-based financial services, and whether they suit you, consult with a professional financial advisor who can guide you on the same.

Here's a detailed financial advisor fee comparison that can help:

What is an AUM-based financial advisor?

An AUM-based financial advisor is a financial advisor who is compensated based on the number and value of assets they manage for their clients. These financial advisors manage the complete investment portfolios of their clients and charge a percentage of the assets they manage. Since these professionals manage all or most of your investments, including buying, selling, and making trades on your behalf, you pay them a direct fee that is calculated per your account balance or investment value. If the financial advisor offers additional services like estate planning, tax planning, retirement planning, etc., they usually charge additional fees for the services provided. However, some financial advisors may offer complementary services and free advice, too.

The precise model can differ for different financial advisors. In some cases, financial advisors may charge a tiered structure and charge a lower percentage for higher AUMs and a higher percentage for lower AUMs. This is usually to motivate investors to entrust the professional with more and more assets.

The type of compensation charged by asset-based financial advisors is known as a management fee. Further, these professionals are also known as fee-only financial planners

How does AUM-based financial advice work?

Here's an example:

Consider a scenario where you hire an AUM-based financial advisor. The financial advisor charges a fee of 1% for balances up to $500,000, 0.75% for balances between $500,000 and $1 million, and 0.5% for values over $1 million annually. Depending on the value of assets, the financial advisor will charge a fixed fee annually. Say the value of your assets when you started was $400,000. In this case, the financial advisor will charge $4,000 annually. However, over time, if your investments increase to $700,000, the financial advisor will charge $5,250.

Financial advisors may look at the value of your account for the purpose of billing at the beginning of a month, quarter, or year or at the end. Since the value of your assets will fluctuate over time depending on your investments, withdrawals, market highs and lows, etc., the fee you pay can be different for every billing period. Usually, financial advisors set a maximum and minimum AUM fee, as well as the precise time they would evaluate your asset's value to avoid discrepancies and ensure transparency. Therefore, make sure to read the contract carefully and discuss these aspects in detail before you hire a professional. Also, make sure to carefully consider whether this type of compensation structure aligns with your financial goals and needs.

What are flat-fee financial advisors?

Flat-fee financial advisors charge a fixed rate based on the services they offer, the number of hours they work for you, or the experience they bring to the table. These financial advisors are compensated for their expertise, time, and knowledge rather than the products they manage for you. This fee can be a one-time fee for a specific financial planning project or an ongoing fee for continued financial planning and investment management services.

Flat-fee financial advisors may offer a variety of services, including financial planning, investment management, tax planning, and retirement planning. The rates for hiring a flat-fee financial advisor can vary for different areas. In most cases, they are decided based on demand and supply and general market rates in a given locality. For instance, bigger cities may be costlier than smaller ones. It helps to look around and strike favorable deals depending on your budget and goals.

Some flat-fee financial advisors also offer monthly or quarterly subscriptions. This usually includes a fixed number of catch-ups.

How does flat-fee financial advice work?

Here's an example:

Consider a scenario where you hire a flat-fee financial advisor for retirement planning. In this case, the professional will help and assist you with all matters of retirement planning, including savings, investments, taxes, withdrawals, etc. They will help you choose the right retirement products, recommend insurance and healthcare plans for retirement, devise a withdrawal strategy based on longevity risk, etc. The financial advisor may charge an upfront fee and then a fixed fee as a monthly subscription. For instance, if the professional charges $300 as an upfront fee and $100 every month, you will pay a total of $1,500 for a year.

Pros of hiring AUM-based  financial advisors

Here are some pros of hiring an AUM-based financial advisor:

1. Transparency:

AUM-based financial advisors charge a fixed percentage of the assets they manage. Their compensation is decided based on the value of investments alone. Therefore, there is greater transparency. You know precisely why you are paying them, and there are usually no hidden costs.

2. Better advice and services:

An AUM-based financial advisor earns more when your investments grow. Therefore, they have a lot to gain or lose. This ensures a higher level of attention to detail and interest in your investments. These professionals may not earn as much if your investments do not do well. As a result, they are more likely to research, monitor, and evaluate your investments and look for the best wealth-creation opportunities.

3. Fixed contracts:

Before you hire a financial advisor, you need to sign a contract. This contract clearly states the percentage charged by the professional, the frequency of payments (monthly, quarterly, annually), as well the period for assessment to determine the value of your assets. You can go through all of these details to ensure there is no hassle later.

4. Additional services: 

Fee-only financial planners also offer other financial support to their clients, including financial planning, estate planning, etc. The advice is not limited to investment advice or management alone. Some professionals may even offer these services for free as a complementary add-on.

5. Expert advice:

Since the prime focus of AUM-based financial planners is on your investment portfolio, you can rest assured to get the best investment advice. These professionals oversee everything from the products to choose, buying and selling of assets, deciding the amount invested in each asset, etc.


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Cons of hiring AUM-based financial advisors

Here are some disadvantages of hiring an AUM-based financial advisor:

1. Biased advice: 

AUM-based financial planners may be partial to promoting products that cater to their needs over yours. A lot of insurance companies, mutual fund houses, etc., offer them commissions for recommending their products. So, they may recommend products to earn money themselves. These may or may not serve your purpose.

2. High costs:

Even with a tiered fee structure, you may end up paying more as your portfolio grows. The commission charged is solely based on your asset's value. Therefore, as your wealth grows, so will the financial advisor's commission.

3. Complicated pricing: 

While the commissions are fixed, the costs of additional services may be hard to calculate. You may not always understand how much money you are paying and what services you are getting in return for the cost.

Pros of flat-fee financial advisors

Here are some advantages of hiring a flat-fee financial advisor:

1. Transparent pricing:

One advantage of working with a flat-fee financial advisor is that you know exactly how much you will be paying for their services upfront, which can make budgeting and financial planning easier. Flat-fee advisors are transparent about their fees, which can help clients better understand the value they are receiving for their money.

2. No conflicts of interest: 

These financial advisors are not likely to offer biased advice as there is no way to earn a direct profit for them from the assets they manage. Instead, they earn a fixed fee irrespective of the services you avail. Hence, their advice may be genuine and unbiased.

3. Cost-effective: 

Flat-fee financial advisors may be more affordable for some investors. These advisors offer a flat rate that can be charged for a one-time consultation or a monthly, quarterly, or annual subscription. You can hire them per your budgetary limitations and goals.

4. Comprehensive financial advice: 

These financial advisors can offer guidance and assistance on a variety of financial topics like taxes, debt, budgeting, saving, investing, business succession, estate planning, healthcare planning, insurance, education planning, and more. You may hire a single person for multiple financial goals and simplify financial planning greatly.

Cons of flat-fee financial advisors

Here are some disadvantages of hiring a flat-fee financial advisor:

1. High upfront fee:

Flat-fee financial advisors may charge a high upfront fee that can be discouraging for new investors. If you do not plan to stick with the professional for the long term, the one-time upfront fee can be high and seem unnecessary.

2. Lack of flexibility:

Some flat-fee advisors may not be willing to adjust their fees based on the complexity of your financial situation or the time they spend working with you. This can be frustrating if you have a lot of financial questions or need more frequent check-ins.

3. Limited access to investment options:

Some flat-fee advisors may only offer a limited range of investment options compared to AUM-based financial planners, which can limit your ability to diversify your portfolio and potentially reduce your returns.

Which type of advisor should you hire?

One key difference between asset-based and fee-based financial services is that asset-based advisors typically have the incentive to increase the value of your assets since this will also increase their own fees. Fee-based advisors, on the other hand, are likely to be more focused on providing unbiased financial advice and guidance since their fees are not tied to the value of your assets.

Having said that, AUM-based financial advisors may be able to monitor your investments with greater attention to detail and provide comprehensive financial advice as they are likely to benefit themselves. These professionals may also better understand investment portfolios and can help investors who are more focused on investing. On the other hand, flat-fee financial advisors are suitable for comprehensive financial planning where clients may be focused on multiple aspects of their finances.

Overall, it's essential to carefully assess your financial needs and goals and choose an advisor who can provide the services and support you need at a fee structure that is reasonable and transparent.

To conclude

It is essential to carefully consider the fee structure of any financial advisor you work with and make sure it aligns with your financial needs and goals. Consider what you want to achieve financially, such as saving for retirement, paying off debt, or planning for a significant purchase. You should also be transparent about your financial situation and ask any potential advisor how they are compensated, so you can make an informed decision. Lastly, while the fee is an important consideration, keep an open mind and look at the benefits the professional can bring over the money they charge.

It is important to choose a financial advisor you feel comfortable working with and trust to help you make important financial decisions. Use the free advisor match service to compare and choose financial advisors that match your budget and needs. All you have to do is answer a few simple questions based on your financial needs, and the match tool will help connect you with 1-3 advisors that are best suited to meet your financial requirements.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.