Email FacebookTwitterMenu burgerClose thin

Flat-Fee vs. AUM-Based Financial Advisors

Share
aum vs flat fee

Working with a professional financial advisor can make or break your long-term financial goals, but how are they paid and how do you pick one? Most financial advisors are paid through a flat fee or by being paid a percentage of the amount you have invested with them, which is called assets under management (AUM). Flat fee and AUM-based financial advisors each have benefits and downsides and each fee structure is ideal for a different type of investor and situation. 

How Flat-Fee Financial Advisors Work

Flat-fee financial advisors work on a set rate, usually based on their experience, how often you’ll see them and the scope of their services. While it is possible to find financial advisors who charge an hourly rate with a retainer similar to a lawyer’s office, that setup is less common. Most often, a financial advisor charging a flat fee will charge an upfront lump sum for an evaluation and strategy session followed by quarterly, biannual or annual check-ins. 

Prices will vary based on your local market and the experience of the advisor but this could look something like an upfront fee of $10,000 for a comprehensive financial plan and an annual cost of $3,000 thereafter for biannual check-ins. 

Monthly subscription services have risen in popularity and are starting to be implemented by more financial advisors. These may include an upfront fee for an initial consultation followed by a monthly subscription or may bake the cost of the initial consult into higher monthly subscription prices.  

Pros and Cons of Flat-Fee Financial Advisors

Flat-fee financial advisors have two main advantages and one main disadvantage compared to AUM-based financial advisors. 

They’re less likely to encourage investments based on the percentage they’ll make, unlike an AUM-based advisor. While a fiduciary advisor is ethically bound to act in your best interests regardless of how they’re paid, an advisor who is paid a percentage based on how much you have invested in certain funds may have a subconscious bias towards the ones that pay them the most. With a flat-fee advisor, there’s no kickback based on how much you have invested, making it harder to doubt the intentions of the advisor. 

The fee-based model can work out to be a better financial deal for clients, especially if you have a large amount invested. For example: if you have $1,000,000 invested, you’ll pay $10,000 annually to an advisor charging 1% of assets under management, but you may only pay $2,000 per year to a flat-fee advisor. 

That flat-fee rate can be a disadvantage if you’re a beginner investor or don’t have a large amount invested yet. Ponying up the cash to pay an initial consultation fee to a fee-based advisor may be difficult if you have limited savings. Working with an AUM-based advisor may be a better deal financially in the beginning if you can find one who will take you on while your portfolio is still small. 

How AUM-Based Financial Advisors Work

aum vs flat fee

Assets Under Management (AUM)-based financial advisors work by charging a percentage based on how much you have invested with them. Occasionally they are paid different percentages for different investments you may have, but it’s more common for them to be paid a percentage based on the total dollar value of your investments. 

AUM percentages will vary based on your local market conditions, the experience of the advisor and the types of investments they manage. Around 1% of assets under management is the most commonly charged percentage. More complex funds and investment strategies may charge a higher percentage. Some firms may drop that percentage over a certain threshold of assets, for example, charging 1% for the first million and 0.5% thereafter. 

More experienced AUM-based financial advisors will typically have a minimum investment amount to take on new clients. While you may be able to find rookie advisors willing to take on beginner investors with small portfolio balances, it can be hard to find an AUM-based financial advisor if you’re new to investing with limited assets for them to manage.

Even seemingly small percentage fees can add up to a large amount over time. In a bulletin published by the SEC’s Office of Investor Education and Advocacy, they compared the value of investing $100,000 over 20 years. They found that an account with a 1% annual fee would be worth $30,000 less at the end of 20 years compared to an account with a .25% annual fee. 

Pros and Cons of AUM-Based Financial Advisors

AUM-based financial advisors are paid based on how much you have invested, meaning that their income increases when your investments increase in value. This gives them a vested interest in how well your investments are performing, theoretically giving them greater motivation to invest your money well. 

AUM-based financial advisors also are typically paid out of your investments, so you don’t have to experience the pain and hassle of paying them directly as you would with a fee-based advisor. If you can find one who will take you on when you’re new to investing, you may save money over working with a fee-based advisor. 

The biggest downside to working with an AUM-based advisor is how much their fees will cost you in the long run. 1% can easily work out to more than you would pay with a fee-based advisor and eat into your long-term investment gains. 

Flat-Fee vs. AUM-Based Financial Advisors

Flat-fee financial advisors cost more for those who are new to investing but provide the same level of service as an AUM-based financial advisor for a fraction of the price once you have a moderate to large portfolio balance. If you’re new to investing and can’t afford to pay the fees for a flat-fee advisor, you may be able to find an AUM-based advisor who will take you on. 

Since an AUM-based advisor is paid based on your portfolio balance, they have a vested interest in your account balance growing. This could cause them to be more aggressive than you are comfortable with or recommend investments based on the percentage they will be paid if they’re paid differently for assets by the fund. 

A flat-fee advisor is paid the same amount regardless of how your portfolio is doing as long as you keep using them. This may cause them to be less aggressive, so you don’t leave them after a big loss. 

The Bottom Line

aum vs flat fee

Flat-fee financial advisors typically cost less for serious investors with moderate portfolios than advisors who charge a fee based on assets under management. If you’re trying to decide between financial advisors, consider the fee structure and investment styles of each to determine which is the best fit for you.

Tips for Hiring a Financial Advisor

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Once you find a potential financial advisor it’s important to ask them the right questions to make sure you’re finding the right match for you.

Photo credit: ©iStock.com/fizkes, ©iStock.com/fizkes, ©iStock.com/fizkes

...