Written by Jonathan Vance, CFP®, EA
For decades, the wealth management industry has relied on the Assets Under Management (AUM) model, charging fees based on a percentage of your investment portfolio. If you called ten different wealth management firms today to inquire about pricing, it’s likely that at least nine would respond with some variation of, “around 1% of assets under our management.”
However, a significant shift is occurring. A new wave of Registered Investment Adviser (RIA) firms, including mine, Vance Financial Planning, are moving away from AUM in favor of flat annual fees (also known as subscriptions or retainers).
From my observation, CFP® Professionals are adopting flat fees to solve three core issues:
I’ve outlined a deeper dive into each of those three concepts below. Additionally, you’ll find a fourth reason that led to my decision to move away from AUM fees, one that was highly personal. I’ve labeled this one the “Small Client Conundrum.”
Whether you are already skeptical of percentage-based fees or simply curious about how financial advisors are paid, this deep dive explores why things are changing and, most importantly, how financial planning clients stand to benefit.
A Quick Note: For this comparison, we are strictly looking at a percentage of assets versus flat ongoing fees that include investment management. This ensures an "apples-to-apples" look at different ways to pay for bundled financial advisory services often referred to as “Wealth Management.”
One of the primary reasons for the shift to flat fees is a growing concern over "fee creep." In my view, percentage-based fees can become detached from the actual time required to serve a client on an annual basis.
Under the AUM model, a percentage fee (typically 1.00% annually) is divided into monthly or quarterly payments. Consider this common scenario:
You have $1,000,000 in your traditional IRA and hire a 1.00% AUM advisor for investment management and financial planning services. Your advisory fee is:
Assuming the advisor is proactive, responsive, and provides tailored financial planning, I would argue this fee is reasonable for the time spent and value provided. But watch what happens as your wealth grows.
Suppose you receive a $2,500,000 inheritance from your great aunt. You call your advisor, open a new account, and transfer the balance to their management. At this point, the total value under management is $3,500,000.
Moving forward, your fee is now:
Is the additional $25,000 of annual fees really fair just because your account balance changed?
While many firms use tiered pricing (where the percentage drops slightly as assets rise), let’s look at real world examples of total costs that you’d expect when hiring a wealth management firm that charges based on AUM.
For this exercise, I analyzed the ADV Filings of three randomly selected major U.S. wealth management firms. For the three I looked at, here are the annual advisory fee amounts for a client with $3,500,000:
This random sample was selected to show that I am not cherry picking data to provide a point. Clients seeing their fees spike from $10,000 to $30,000+ is a very real possibility during significant account movements, whether immediate or slowly over time.
I used “inheritance” for the sake of simplicity, but that $2,500,000 added to your advisor’s management could also come from things like:
At what point does the fee become too detached from the service?
For almost every other professional service, you pay for the scope of the work and the time of the expert. Imagine how strange this interaction would be:
You: “Hello, Mr. Handyman, I’d like you to fix a door that’s sticking. What is your fee?”
Handyman: “I’d be happy to help. For door services, I charge 1% of the home’s value. Since your home is worth $405,000, the fee is $4,050.”
That $4,050 might be fair if you have a custom-built walnut door requiring specialized tools and days of labor. But for many standard repairs, it’s easy to see how that quote could be lopsided.
Flat fee financial planners are working to make conversations around fees more transparent, and, in my opinion, more logical. Just because you have more doesn’t mean that you need to pay more.
When an advisor’s income is tied directly to your account balance, their objectivity can easily become blurred.
This isn't to say AUM-based advisors are "out to get you," but rather to highlight a structural flaw: the AUM model creates inherent conflicts of interest on certain account activities that are reduced by flat fee models.
Imagine we determine it is in your best financial interest to pay off your $200,000 mortgage. To fund this, you must withdraw $200,000 from the accounts your advisor manages.
Under the 1% of AUM model, that single piece of advice reduces your advisor’s annual revenue by $2,000 per year.
Since wealth management firms are for-profit companies and their advisors are paid professionals, too many withdrawals like this can impact an advisor’s compensation and job security.
Under that kind of pressure, it is easy to see how an advisor might prioritize their own bottom line over yours, whether consciously or not. They might forget to analyze your mortgage rate or find reasons for you to keep the debt simply because they aren't looking for a pay cut.
When you pay for guidance, you deserve recommendations that are:
It is a tall order to ask a client to "trust" that their advisor will prioritize the right advice over a $2,000 pay cut. Maybe they will, maybe they won’t, but when you’re paying for professional guidance, you shouldn't have to guess whether your interests come first.
By charging a flat fee, your advisor remains incentivized to keep you as a happy, long-term client, but they are no longer financially penalized for telling you to do one action versus another with your money.
When a fee is tied to an account balance, an advisory relationship naturally revolves around the stock market. This leads many clients to believe that investment management is the primary value an advisor provides.
However, if you believe in long-term, disciplined investing, there is actually very little "market talk" required on a regular basis beyond what’s necessary to adhere to your financial plan.
I don’t want to downplay the importance of your investment plan.
Neglecting things like asset allocation, tax efficiency, internal fees, or diversification can pose a real threat to your financial plan. Making informed decisions on how to invest your money and maintain your portfolio over time will play a crucial role in funding your future financial goals.
But investment advice and investment management services are only a fraction of the value that financial planners can provide to their clients.
In my experience, the most meaningful breakthroughs happen when we move past the ticker symbols and focus on the variables we have greater control over, like:
When an advisor’s compensation is tied directly to portfolio size, "Market Updates" often dominate the conversation. Unfortunately, this focus can crowd out the high-impact planning decisions that might further move the needle for your financial future.
Charging a flat fee allows advisors to spend less time talking about investments and more time talking about how to get the most life out of your savings.
While this may seem like a behind-the-scenes industry detail, it matters tremendously to me on a personal level. Adopting a flat-fee model allows me to provide the same high level of service to every person I work with.
In my firm, I don’t have “big” or “small” clients, I just have clients.
In my past experience at traditional firms, I often sat across from wonderful people who, unfortunately, felt the need to apologize for their account size. I frequently heard things like:
I hated knowing that these clients had to wonder if they were worth my time or a good fit for my services. They absolutely were.
I would spend hours preparing for my discussions with them, keeping notes on their travel dreams and favorite places they’ve been, or even how many miles they managed to squeeze out of a beloved Honda Civic.
And yet, nothing that I could do or say would adequately address their concerns. They knew how to do math, and they knew other clients were paying 5x or 10x more than they were. Because of this, I couldn’t fix their feeling of “second-class status” that is unavoidable in percentage based billing models.
By charging a flat fee, my clients do not have to wonder if they are "important enough" or “big enough” to receive my best work.
On an emotional level, that alone is priceless to me.
I am, of course, a biased source. I have a professional interest in the flat-fee world. In the spirit of transparency, it’s worth noting that the AUM model can still make sense in certain scenarios. Here are two:
For most other scenarios, consider selecting a flat fee financial advisor to better align the fee you’re paying with the services you’re receiving.
If you enjoyed this post and are considering hiring a financial planner, here is additional information on my current pricing.
If my firm isn’t a good fit for your situation but you’re interested in hiring a financial planner with a flat fee model, check out this list of other flat fee advisors.
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