Financial advisors get flexible with fees — with or without AUM charges

As more financial advisors adopt different fees from the industry's traditional rate of 1% of assets, they're inventing new ways of confronting one of prospective clients' main concerns.

Almost all registered investment advisory firms collect a fee based on the number of assets under management, but just under half charge fixed or hourly rates, according to the latest annual snapshot of companies' Securities and Exchange Commission filings by the Investment Adviser Association and National Regulatory Services, a COMPLY company. The price of advice represents one of the most important practice management questions for planners amid a debate that often divides the industry even as it may confuse the clients paying the fees.

But industry statistics, anonymous messages among advisors on Reddit and focus groups with affluent investors indicate that there is much more nuance involved than a simple either-or choice of AUM vs. retainer fees. The continuing rise of the independent RIA movement gives advisors more room to take their own path on fees than some may think, though challenges remain around finding the right amount to charge and explaining that expense to the clients.

"For financial advisors, it's OK to feel confident to be a little more explicit," said Laura Varas, the CEO of savings, wealth and retirement data research firm Hearts and Wallets, said in an interview. "You're paying for it. It's worth buying."

READ MORE: Financial advisor compensation: Grids, fees and conflicts

Cost concerns

Advisors and consumers are open to flat fees and clear disclosures about the cost, according to available data. Among potential affluent investor customers, cost transparency and general expenses took the top two spots in a survey this month by consulting firm Cerulli Associates as the most difficult components of hiring an advisor. At least 46% cited the former as a concern, while 28% reported the latter worry. However, for those who are already working with an advisor, only 11% said their expenses are not transparent enough, and just 12% called them too high. 

Clear fees are "critical for growing one's book of business and building long-term, loyal relationships," Cerulli research analyst John McKenna said in a statement. "Advisors must ensure their fee schedule is easy to understand and the services provided are outlined specifically so clients know exactly what they are paying for and how they will pay — while also understanding how clients wish to engage with their finances and with the advisory team."

Non-AUM fees are growing, but they show more ubiquity than some sort of upstart trend. Over the past decade, the share of SEC-registered RIAs charging a flat or fixed fee climbed 3.4% to 44.9%; the portion charging hourly rates ticked up by 1.7% to 29.5%, the latest RIA snapshot found. About half, 49.6%, collect fixed or hourly fees, and more than 85% of RIAs that offer financial planning services receive those forms of payment. 

Meanwhile, 95.2% of RIAs charge asset-based fees in some form, but a mere 20.8% are solely using AUM fees. Most RIAs get paid by clients through a combination of the types of fees, the report stated.

"Advisor compensation structures align advisor interests with their clients' interests," it said. "Through asset-based fees and performance fees, advisors link their compensation to the success of their clients' investments. By charging fixed and hourly fees for some services, advisors can provide services other than portfolio management, such as financial planning, in a cost-effective manner."

Rhetoric around the industry frequently belies that pragmatic language. The messages in a subreddit conversation last week in the "r/investing" community of Reddit called "Roast me: I'm a financial advisor who charges AUM" devolved into planners taking potshots at each other over the correct ethical definition of "fee-only" and accusations of spreading misinformation about the profession. The original message by a 15-year veteran advisor and one of the most upvoted responses revealed more subtlety and respect across the professional community, though.

The advisor noted that "much of the feedback I see on Reddit is so negative toward advisors that charge AUM" but said that "very little of what I do is related to investment management."  In addition to investing, the practice provides cash-flow planning, legal and estate services, tax consultation and balance-sheet management, the advisor said.

"I feel like I do a lot for my AUM fee, which starts at 0.65% and declines to 0.4% at $10M," the advisor said. "However, it doesn't seem like the world thinks very highly of what I do for a living. So Reddit, roast me. Tell me why you don't need me."

Seemingly none of the responses took the advisor up on that request.

"It sounds like you offer a lot of value for your clients," a commenter said in a reply with over 100 upvotes. "And given your account minimum, you're not preying on someone who can't really afford it. Most of the hate in this sub for AUM fees seems to be targeted towards advisors charging entry-level investors — someone with $50k to invest getting charged 1% to essentially just invest in index funds. You're obviously doing a lot more for the people who actually need it."

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Refreshingly clear fees

For planners who are using non-AUM fees, their model offers fewer conflicts of interest, more customization and an ability to work with clients who are outside the standard base of rich people. Many planners criticize AUM charges because they give advisors an incentive to bring more assets in-house from accounts that may otherwise be in a client's best interest. 

Some could be building up a solid nest egg in their employer's 401(k) plan, according to Phoenix-based Singh Private Wealth Management founder Raman Singh, who said he was motivated to ask, "Were you really a fiduciary, or were you just trying to get paid?" when he saw advisors move money out of a client's pension plan to an account under their own control. When he launched his RIA last year, he decided to use alternatives to AUM fees.

"The whole idea was to be transparent about fees and letting people understand that, as financial planners, we go beyond just managing investments," Singh said in an interview. "I wanted to bring the transparency component. I just dont think it's fair to the clients that, when their investments are growing, my fees are growing."

Planner Leighann Miko, the founder of Los Angeles-based Equalis Financial and co-founder of newly launched independent advisor network Avise Financial, made a similar choice in 2020 when she was refreshing her RIA's brand, she noted in an email. The non-AUM fees "convey the value of planning instead of emphasizing the investments," she said.

"We utilize a minimum annual base retainer fee that covers all financial planning as well as the management of the first $500,000 of a portfolio," Miko said. "Any portfolio balance greater than $500,000 is billed at 0.6%. Of course, if a client doesn't have any assets yet, they pay only the base retainer fee for the financial planning. One of the benefits there is that the client gets access to quality advice without having to have a $1,000,000+ portfolio. As a firm, this helps us reach a broader, more diverse population."

In a notable contrast to much of an industry that leaves many specific costs buried in complicated, lengthy disclosure statements, her RIA's website and that of Singh's firm each share the exact prices of their services. Singh's firm has different rates for three tiers of retainer fees, a cost per hour and a price for creating a comprehensive financial plan.

"An average person says, 'Oh, I can't have a financial advisor because they're too expensive,'" he said. "Our fees should be aligned to helping out the average American."

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Challenging caveats

Prospective clients with above-average incomes express interest in flat fees as well. In Hearts and Wallets focus groups of people with $1 million or more in investable assets, participants told the hosts that "flat-fee planning and advice would be preferable" and that "I said a flat fee because I'd like to know what I'm paying" and that "percentage of investment sort of punishes you for having a lot of money." Picking the right price point for the fee often proves more tough for advisors than convincing clients that a flat rate itself makes sense, Varas said.

"When you set a flat fee for anything, you've got to get it right," she said. "The bigger risk for flat fees is setting them too low."

Advisors using alternative fees may also need to deflect some other misconceptions among clients, according to Miko. 

Many people still see portfolio management as "the main function of a financial advisor," rather than grasping how "planning is the primary focus, which then dictates the investment strategy," she said. The retainer fee can help drive home that concept.  

In that vein, a 1% rate sometimes sounds as if it's less than $10,000 for a portfolio of $1 million, she said. So the raw figures could register as "a much bigger pill to swallow, even though they may be paying less than the average AUM fee on the same portfolio," Miko added.

"The advice I would give other advisors considering using a different fee than the 1% of AUM fee is to be confident in the value they are providing for their fee, whatever it may be," she said. "Be sure the fee they are charging is tied to the service being provided. Another thought is to be aware that they may need to do a bit more explaining of the fee, since the AUM model has dominated the industry for decades. It's like a bad habit that we just can't break."