Flat-Fee vs. AUM-Based Financial Advisors

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 consultation into higher monthly subscription prices.

Pros and Cons of Flat-Fee Financial Advisors

Working with a flat-fee financial advisor offers a unique structure that can be beneficial for some people but may have limitations for others. Here’s an overview of the pros and cons to help you decide if it’s the right choice for you:

Pros of Working with a Flat-Fee Financial Advisor

Cost Transparency: Flat fees provide clear and upfront costs, so you know exactly what you’re paying without surprises. This can eliminate the complexity of other fee structures, such as asset-based fees (AUM fees), which are often a percentage of managed assets and can vary depending on your account balance.

No Conflict of Interest from Asset-Based Fees: Flat-fee advisors are not incentivized to “push” you to keep assets under management since their fee isn’t tied to your asset total. This structure can result in unbiased advice, as the advisor’s income does not depend on selling certain products or managing a larger portfolio.

Better Alignment with Client Goals: Advisors charging flat fees typically focus on financial planning and holistic advice, which may better align with clients focused on comprehensive planning rather than just investments. This is often beneficial for clients who want guidance on budgeting, debt management, tax planning, and retirement but don’t necessarily need full portfolio management.

Predictable and Budget-Friendly: A flat fee can be easier to budget for, as it doesn’t fluctuate with the value of your investments or trading activity. This can be especially beneficial for those on a fixed income or with limited financial flexibility.

Greater Access to Financial Advice for Smaller Portfolios: Flat-fee structures can make financial advice more accessible to people with smaller portfolios who might not meet the minimum asset requirements of advisors who are charged by AUM. It opens up professional financial guidance to a broader audience.

Cons of Working with a Flat-Fee Financial Advisor

It’s important to clarify service details upfront, as you might end up paying a flat fee for limited advice if you don’t ask about their offerings.

May Be More Expensive for Small Portfolios: For individuals with small portfolios or those just starting out, a flat fee can sometimes be a larger percentage of their total assets compared to AUM-based fees. This can make the service seem expensive relative to their total net worth.

Less Incentive to Grow Your Portfolio: Since flat-fee advisors don’t benefit directly from your portfolio’s growth, they may lack the incentive to focus on maximizing investment returns. This could be a downside if you’re primarily seeking investment management rather than comprehensive financial planning.

Potential for Lower Engagement with Asset Management: Flat-fee advisors are often geared toward planning and guidance rather than active, ongoing management, which may not work for people seeking hands-on investment oversight. They may provide a plan but not necessarily monitor or adjust investments as frequently as an AUM-based advisor might.

Potentially High Fees for High-Net-Worth Individuals: For high-net-worth individuals, flat fees may add up to a larger overall cost than a percentage of AUM fee structure, especially if their advisory needs are limited or straightforward. Those with extensive investments might find AUM fees more economical, particularly if they desire comprehensive asset management.

Variability in Service Offerings: Flat-fee advisors can vary widely in the services they offer, from limited, one-time advice to more ongoing support. Some may offer more guidance on budgeting, tax planning, or estate planning, while others may limit their scope.

How AUM-Based Financial Advisors Work

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.

Bottom Line

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 have a free introductory call with your advisor matches to decide which one you feel 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.