Financial Planning is About More Than Your Investments, So Why Do Advisors Charge Based on the Size of Your Portfolio?

The client asked me: How do I know that you are working in my best interest? If you charge a flat fee instead of a percent of my assets, how do I know that you are incented to grow my assets for me?

When I started my business I made a thoughtful decision to charge a flat or hourly fee that was designed to reflect the time and effort that is put forth on each client.  Assets Under Management (AUM) didn’t work for me and it might not work for you, here’s why:

What if you have no assets?

Lots of my clients have not started to grow their assets yet – worse, many of them have negative net worth. Why? Because when you work with young families, you’ll find that they are still paying off student loans – massive amounts of student loans. Many of these young families are starting to build their wealth AND they are going through some of the most expensive financial stages of their lives – buying homes, getting married, saving for their children’s college – they need financial guidance and they can’t get it from an AUM model.

AUM may not give your advisor the right incentive, either.

If your advisor is paid by assets under management, he may not have any incentive to tell you to use some of your assets to pay off that 5.5% mortgage or to pay down those 6.65% student loans. Every pricing model has a flaw in it – just be sure you know what you’re getting.

It doesn’t cost twice as much to manage $2 million dollars than it does to manage $1 million.

AUM models are based on how much money your advisor is managing for you. If the schedule is 1% of assets, you pay $10,000 to manage a million-dollar portfolio and $20,000 to manage a two-million dollar portfolio. Do you think that requires twice the amount of work?

Some advisors provide breakpoints, meaning that accounts with under $1 million may be charged 1% of assets, and anything between $1 million and $3 million is charged .9%. That’s still pretty much twice as much.

When the market drops, your advisor’s paycheck does, too.

If your advisor’s pay is tied to the size of your account, she will want to be sure it grows. In a market downturn you suffer and so does your advisor. That’s good, right? Because your advisor will be incented to help your portfolio grow…Not necessarily. Prior market downturns have seen some advisors taking extra risk with their client’s assets in order to reach for growth. If you’re an aggressive investor, this may be right for you. But, if you’re like a majority of investors, you don’t want this risk in your portfolio.

An AUM fee is an illusion – if you had to write that check, you wouldn’t.

I’ve met many people who are paying $20,000 to manage their $2 million portfolio. The advisor fees are automatically taken from the account. They do show up on the statements, if a client looks, but many do not read their statements. If these clients had to write a check for $5,000 a quarter, I’m sure they’d be asking their advisor: What have you done for me lately?

You’re probably getting a sophisticated robo advisor for your money.

In today’s world your $2 million portfolio is not enough to warrant personal attention from the big players. Instead, these companies have developed model portfolios or algorithms that can contain anywhere from 20 to hundreds of holdings. Each model portfolio has a goal like “income and growth,” or “capital preservation” and you are provided the model that matches your goals (hopefully). These holdings are not picked specifically for you, your advisor is not choosing which ones to buy and sell for you – so why are you paying so much? The average AUM fee is 1% (see How Much Does a Financial Advisor Cost)

This doesn’t even include your retirement assets at your employer

When you’re working with an advisor using assets under management, don’t expect insight on how to choose investments for your employer plan. It’s also not clear that under this model your advisor will help you understand the best way to pay off those student loans or pay for college for your children. AUM doesn’t always mean comprehensive financial planning – and isn’t that what we all need? Finances are complicated; someone who takes the time to know you and your finances will be able to provide the best guidance.

The Assets Under Management model worked for a time, but does not continue to provide clients what they need in terms of true financial guidance. If you’re looking for holistic planning and a client-centric experience with unbiased advice, look for a fee-only financial planner.

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