Financial Advisor Fee Structures: Comparing Flat Fee and AUM

One of the most important decisions you’ll make as a financial advisor is how you structure your fees. Your pricing model directly impacts your firm’s growth trajectory and sustainability, as well as your clients’ trust and satisfaction.

While there are many ways to charge your clients, two of the most popular fee structures are flat fee financial advising and Assets Under Management (AUM). Both pricing structures have pros and cons, depending on your client base and suite of services. By understanding their key differences, you can choose the structure that’s best suited to your practice with confidence.

Below, we’ll briefly define flat fee vs. AUM pricing structures and review their benefits and drawbacks. After that, we’ll explain how you can make an informed decision about which model you should use in your practice.

Flat Fee vs. AUM: What’s The Difference?

Before diving into the benefits and drawbacks of each pricing model, let’s briefly review how they differ in structure and compensation.

What is a Flat Fee Payment Structure?

With a flat fee payment structure, you charge your clients a fixed amount for a set of services over a specified period, whether that’s monthly, quarterly, or annually. Some flat-fee advisors also require new clients to pay an upfront fee, similar to a retainer, to secure their commitment to the advisory relationship. These upfront fees range from $2,000 to $7,500, on average.

If you offer a broad range of services, such as tax planning, retirement planning, estate planning, debt management, or cash flow management, you may want to introduce a tiered pricing model. This lets your clients choose a service package that best suits their financial needs and goals. You can also offer short-term services for a one-time fee.

No matter how you price your fees, they won’t be impacted by fluctuations in your clients’ investment portfolios or market conditions. This provides both you and your clients with greater predictability and transparency, as you both know exactly what they’ll pay from the start.

What is an AUM Payment Structure?

With an AUM payment model, your fees are calculated as a percentage of the total assets you manage for each client, ranging from 0.5% to 1.5%. For example, if you charge a 1% fee for a client with an investment portfolio of $1 million, you would earn $10,000 that year. As your client’s portfolio grows, their annual fee will naturally rise, providing you with a scalable revenue stream.

Most advisors who adopt an AUM pricing model establish a minimum asset requirement of at least $250,000 for new clients. This ensures that they’re properly compensated for the time, expertise, and resources involved in managing their portfolios.

Some AUM-based advisors use a tiered pricing system, offering reduced fees as clients’ assets grow. For example, they might charge 1% on the first $500,000 and 0.50% on assets above that. This structure rewards clients for growing their portfolios and encourages long-term wealth accumulation.

Pros and Cons of a Flat Fee Pricing Model

Now that you know the basic differences between flat fees and AUM fees, you may be wondering which type is right for your financial advisory practice. To help you decide, let’s examine their pros and cons, starting with the flat fee model.

Pros

• Predictability – With a flat fee model, your clients know exactly how much they owe upfront, enabling them to budget accordingly. This transparency gives them peace of mind, knowing they won’t encounter unexpected costs or sudden fee increases. It also benefits you as an advisor since it can simplify your billing and administration. Your earnings won’t be subject to market fluctuations or unexpected shifts in your clients’ portfolios.
• Effective Pricing For Holistic Services – Every financial advisor’s suite of services varies. While some advisors focus primarily on asset management, others may take a more holistic approach, providing budgeting advice, tax planning services, debt management support, and more.
  If you offer a wide range of services, a flat fee model allows you to price your offerings more effectively, ensuring clients only pay for the advice that aligns with their specific needs and goals. This approach prevents clients from overpaying for unnecessary services while ensuring you’re fairly compensated for your time and expertise.
• Accessibility – Clients with smaller portfolios may not meet the minimum asset requirements of many AUM-based advisors. By employing a flat fee model, you can make your advice more accessible to a broader range of clients without compromising your revenues.

Cons

• Cash Flow Inconsistency – Depending on how you structure your payment schedule, a flat fee model could lead to cash flow inconsistencies. Clients who pay monthly or quarterly may cancel before the year is up, causing unexpected revenue disruptions.
• Limited Revenue Potential – Another limitation of the flat fee model is that it can cap your revenue growth. Since your fees won’t be propped up by your clients’ portfolio appreciation, they’ll only increase when you acquire more clients or raise your rates.
• Cost-Prohibitive For Some Clients – Clients with limited savings may struggle to afford a flat fee advisor. For example, a young entrepreneur who is just beginning to grow their wealth may not have the cash on hand to pay the upfront fee. In contrast, an AUM model can help clients get in the door by spreading their fees over time as their assets grow.
• Higher Costs For Small Portfolio Clients – Clients with smaller portfolios often end up paying more under a flat fee model. For example, consider a client with a portfolio of $25,000. A flat fee advisor may charge this client an upfront fee of $2,000. Meanwhile, an AUM advisor who charges 1% would only require $250. Due to this cost disparity, using a flat fee model may deter clients with small portfolios from choosing your practice.
• Unclear Value Proposition – Clients with fewer assets may question why they’re paying the same amount as individuals with much larger portfolios, particularly if their assets require minimal management.
• Perceived Lack of Portfolio Growth Incentive – AUM-based advisors have a clear financial incentive to grow their clients’ wealth. While flat-fee advisors share this aim, clients may feel less assured of their commitment to their portfolio growth. High-net-worth clients, in particular, often prefer advisors whose compensation directly aligns with their portfolio growth. Thus, they may question your dedication to maximizing their assets if you use a flat-fee model.

Pros and Cons of an AUM Pricing Model

Like the flat fee structure, an AUM model has several benefits and drawbacks you should be aware of.

Pros

• Alignment of Interests – An AUM model aligns your and your clients’ interests. Since you’re compensated based on their portfolio size, you’re naturally incentivized to grow their wealth and ensure strong returns. Clients often feel more comfortable working with advisors who employ AUM models because of this alignment.

It also helps justify your fees, since your clients know your success is tied to their financial growth. When you perform well, your services effectively pay for themselves, enhancing your clients’ trust in your expertise.

Read More: How to Use Different Management Styles to Enhance Your Clients’ Returns

• Clear Value Proposition – Clients with large net worths typically didn’t get there by making careless financial decisions. Thus, these individuals want ongoing reassurance that your services are worth the cost. With an AUM model, these clients can directly link your fees to their portfolios’ performance, providing a clear and compelling value proposition.
• Streamlined Billing – With an AUM model, your clients’ fees are automatically deducted from their managed accounts, simplifying the payment process for everyone involved. Since you’ll never need to wait on their bill payments, you can enjoy smoother cash flow. Likewise, clients often appreciate the convenience of having their fees directly withdrawn. Not only does it allow them to invest a larger portion of their funds, accelerating their portfolio growth, but it also provides them with a seamless, hassle-free investment experience.
• Reliable Revenue Growth – Unlike a flat-fee model, which only allows you to grow your revenue through client acquisition or rate hikes, an AUM model allows you to earn more money as your clients’ portfolios increase in value. You can use this revenue growth to reinvest in your practice, whether you want to hire more staff, implement a Turnkey Asset Management Platform (TAMP), or expand your service offerings.

Read More: What is a TAMP and Should You Use One?

• Potential for Higher Client Retention – While exceptional service and communication are crucial for client retention, an AUM model can enhance long-term relationships by aligning your success with the growth of your clients’ portfolios. This ongoing focus on portfolio performance encourages clients to stay loyal to your practice. Additionally, your clients may enjoy a more seamless investment experience, as there’s no need to frequently reassess fees or handle manual payments. This “hands-off” approach is particularly appealing to those who value simplicity and convenience.

Read More: How to Attract and Retain Clients as a Financial Advisor

Cons

• Dependence on Market Performance – With an AUM model, your revenue is closely tied to financial markets’ performance. This can be a double-edged sword. When markets perform well, you may see outsized gains in your annual revenues. However, when the markets decline or stagnate, your revenues may suffer similar consequences.
• Less Suitable For Clients With Small Portfolios – There’s a reason why many AUM-based advisors only work with clients who have a certain amount of wealth to manage. These minimum asset requirements ensure that advisors can generate sufficient revenues to cover their operational costs and remain profitable. Clients with small portfolios may not generate enough revenue under an AUM model to justify the time and resources involved in managing their accounts. Thus, if you want to work with a broad range of clients, an AUM model may not be the most sustainable option.
• Cost Considerations For High-Net-Worth Clients – While AUM models don’t generate as much revenue from smaller clients as flat-fee models, the opposite is true for high-net-worth individuals. For instance, a client with a $2,000,000 portfolio would need to pay an AUM advisor charging 1% $20,000 annually, while a flat-fee advisor may charge them significantly less. Some high-net-worth clients may value the cost savings of working with a flat-fee advisor over AUM advisors’ growth-oriented incentive structure. If you want to tilt the scales back to AUM, you may need to expand your service offerings beyond asset management to justify your elevated fees.

Read More: The Role of the Modern Financial Advisor: How Technology is Shaping Their Success

How to Choose the Right Fee Structure for Your Financial Advisory Practice

As you can see, both flat-fee and AUM pricing models bring a lot to the table. The right choice ultimately depends on the types of clients you work with, your service offerings, and your overall business model.

• Flat fees may be better if you offer a broad range of services beyond investment management and want predictable revenues that are protected from market fluctuations. This model also works well if you want to work with clients who may have smaller portfolios or desire a more transparent, straightforward pricing structure.
• AUM fees may be better if you specialize in wealth management, serve high-net-worth individuals, or focus heavily on portfolio growth. It can also help you scale your business and increase your revenues as your clients’ assets grow, steadily increasing the value of your book of business.

If you want to take advantage of both pricing structures’ benefits, you can charge an AUM fee for your investment management services and a flat fee for everything else. This hybrid approach allows you to cater to a wider range of clients while leveraging the strengths of each model.

Read More: Measuring Your Book of Business as a Financial Advisor

Optimize Your Fee Structure with Alden Investment Group

In summary, your chosen fee structure can influence how your clients perceive the value of your services and impact the sustainability of your business model. Thus, you want to make your selection strategically.

If you want expert guidance while making this decision, Alden Investment Group can help. As a leading Registered Investment Advisor (RIA), we’ve helped countless financial advisors select the best fee model for their practices, whether that’s flat fee financial advising, AUM, or a combination.

By joining our RIA, we can help you optimize your pricing model, ensuring that it aligns with both your business goals and your clients’ unique needs. We can also help you hone your competitive edge with our innovative investment solutions, TAMP technology, and seasoned investment committee.

Ready to refine your financial advisory’s fee structure? Reach out to Alden Investment Group to get started.

Sources:

Nerd Wallet. How Much Does a Financial Advisor Cost?
https://www.nerdwallet.com/article/investing/how-much-does-a-financial-advisor-cost

Advisor Find. What is AUM?
https://advisorfinder.com/resources-for-clients/about-advisors/aum