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If you’re interviewing financial advisors, you’ve probably realized there are a lot of ways advisors charge for their services. More importantly, those fee structures can influence the advice you receive.
Understanding how advisors get paid, and the incentives created by each model, can help you choose an advisor aligned with your interests.
I think it is important to understand a little bit of the history behind how the industry billed clients to see the evolution of how things have changed, and where they are going. In my opinion, each evolution has reduced conflicts of interest and improved outcomes for many clients.
It was not too long ago when the most common financial advisor made their money off commissions from selling products. This could be fees from funds they recommend, trading fees, or a commission from a product like an annuity. These advisors still exist, but they are not as common as they used to be.
This is where fee-only advisors stepped in.
Many advisors believed commissions could create incentives that didn’t always align with their client’s best interests. So, they started charging a percentage (typically around 1%) of the assets they managed (AUM), but they received no additional fees.
Consumers gravitated towards this fee-only concept because it was clear that there were fewer conflicts of interest involved. They felt they could trust that the advisor was making recommendations with their best interests in mind, and they weren’t making anything extra by recommending specific funds.
This is the most common fee structure right now.
The next wave, which is currently growing, is a push to reduce the conflicts of interest even more by charging a flat fee.
Flat-fee is still “fee-only” because there aren’t any commissions being made from recommendations. However, by structuring the fee to be a flat dollar amount instead of a percentage of AUM, the advisor and client have even fewer conflicts of interest to navigate.
Because compensation no longer changes based on the size of your portfolio, many planning decisions become easier to make objectively.
Having worked under both models, I strongly prefer the flat-fee approach because I’ve seen how it changes conversations with clients. Here are some of my favorite examples that have led to this belief:
I once made an argument that there isn’t really a need to have a large number of equity funds in an equity model. You can create a well-diversified portfolio with as little as 1–3 funds, yet there are many models advisors use that have 10+ funds in them.
When broken down, there tends to be a lot of overlap, so there isn’t really a benefit being added with the additional funds.
The response I received was shocking:
“When clients pay you $20K a year, or more, they need to feel like there’s a level of complexity to the portfolio that they couldn’t do on their own.”
I replied, “But where is the benefit?” and then there was silence.
There are times when I do think it makes sense to add more to the portfolio, but it isn’t universal across the board. And I certainly won’t create a portfolio to look more complex just for optics.
My job is to get you through retirement successfully, which I do consistently with “simple” portfolios.
This has led to less confusion and more confidence when discussing the investment strategy with clients. Less confusion and more confidence in understanding the plan and strategy typically leads to less stress during volatile times.
A very common situation is where we are managing everything in the household other than the current 401(k). At retirement, you are usually left with two options—roll the account into an IRA (under the advisor’s management) or keep the funds in the 401(k).
We have an entire checklist to decide what to do, but it is very common to try and consolidate your accounts as best as possible, leading to rolling the 401(k) into the IRA.
This was my least favorite conversation under the AUM model because there was often unnecessary hesitancy. Not because they didn’t want the funds to be managed, but because their total fee would increase, sometimes nearly doubling it.
While I believed I was creating enough value to justify the recommendation, I understood where the client was coming from.
Under the flat-fee model, hesitation largely disappears. Our fees won’t change just because you brought in a new retirement account.
This makes it easier to focus on the most important question:
What is best for you?
In the early days of moving to the flat-fee world, I had a situation where a client was previously paying about $25,000 per year for their advisory services. This was around 1% of their portfolio, which is pretty standard.
Their situation was fairly simple. 90% of their assets were in an IRA, with the rest in Roth IRAs. This is easier to manage than a portfolio with a large percentage of their funds in taxable brokerage accounts, so we charged them $10,000 per year.
With the $15,000 in savings, they added an additional $10,000 to their travel budget, resulting in a few more vacations every year during their early years of retirement.
I’m the first to admit cheaper is not always better. I do not strive to be the cheapest. I simply want a fee that is fair to both parties.
There are times where a $25,000 annual fee is justified, but in this situation, it was clear that $25,000 was too much.
The first step in finding the right advisor to work with is finding someone you feel you can trust. The right advisor isn’t determined solely by how they’re compensated.
There are outstanding advisors in every fee model, and there are also poor advisors in every fee model.
However, understanding how an advisor gets paid helps you recognize the incentives behind their recommendations.
Ask how they charge and put the fee in dollar terms. Then decide whether those incentives align with the kind of relationship you want.
Ultimately, the best advisor is someone whose advice, expertise, and compensation structure align with your goals.
It shouldn’t, but compensation structures influence incentives. Every advisor needs to make a living, and it is difficult to remain completely objective when one recommendation results in more compensation than another.
The best advisors recognize these conflicts and work hard to put their clients’ interests first, regardless of their fee model.
Yes, most are. “Fee-only” means the advisor doesn’t receive a commission from selling investments or insurance products.
At Bugle Valley, the flat fee is the only compensation we receive. We do not earn commissions or receive additional compensation for recommending specific investments or financial products.
Generally, yes.
Given our fee doesn’t change when money moves in or out of your accounts, decisions such as rolling over a 401(k), buying a second home, making a large gift, receiving an inheritance, or selling real estate don’t affect our compensation.
That allows us to focus on the most important question:
What is in your best interest?
A flat-fee model often makes sense for people who want ongoing planning and investment management without having their advisory fee increase simply because the market performed well.
At Bugle Valley, we find the most people gravitating towards this fee structure have over $2 million. They value professional guidance, but when they do the math of the AUM fee, it is hard to stomach.
There are legitimate reasons many advisors use an AUM fee model. It aligns the advisor’s revenue with the growth of the client’s portfolio, and for some firms it can be a simple, transparent pricing structure.
Every fee model has advantages and trade-offs. The important thing is understanding how each model works and choosing one that aligns with your preferences and financial situation.
Beau Kemp, CFP®, RMA®
Founder, Financial Advisor
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