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If you are searching for a financial advisor, one of your first questions is: “How much will financial advice cost me?”

Financial advisors use several compensation models, including flat fees, hourly fees and fees based on assets under management, usually known as AUM fees. The structure an advisor uses can significantly affect how much you pay over time, particularly as your investment portfolio grows.

What Does a Flat-Fee Financial Advisor Charge?

Under a flat-fee arrangement, the client and advisor agree to a specific dollar amount for a defined set of services. The fee may be billed monthly, quarterly or annually, depending on the advisory agreement.

A flat advisory fee does not automatically increase because the stock market rises, the client makes additional investments or the portfolio becomes larger. Instead, the fee may be reviewed periodically based on factors such as:

• The complexity of the client’s financial situation
• The services being provided
• The advisor’s expected time commitment
• Business ownership or equity compensation
• Changes in tax-planning or retirement-planning needs
• Estate and insurance considerations
• Other significant changes in the client’s circumstances

This structure allows clients to understand what they are paying in actual dollars and how that fee relates to the work being performed.

How Do AUM Fees Work?

With an AUM arrangement, the advisor charges a percentage of the investments being managed.

For example, a 1% annual fee on a $500,000 portfolio equals $5,000 per year. If the portfolio grows to $1 million and the percentage remains unchanged, the annual fee becomes $10,000.

AUM fees are commonly calculated and billed quarterly. Because the dollar amount changes with the portfolio’s value, clients should understand both the stated percentage and what that percentage represents in actual dollars.

An AUM arrangement may be appropriate for clients who want investment management and related services closely connected to their portfolios. However, clients should periodically consider whether the services they receive continue to justify the changing dollar cost as their assets grow.

Fee-Only vs. Flat Fee: What Is the Difference?

“Fee-only” does not mean the same thing as “flat fee.”

A fee-only financial advisor is compensated by clients rather than through commissions from selling financial products. A fee-only advisor may charge a flat fee, hourly fee, subscription fee, AUM fee or a combination of client-paid fees.

Therefore, an advisor who charges an AUM fee can still be fee-only.

Vetoshko Wealth Management is a fee-only financial advisory firm that uses a flat-fee structure for wealth-management services. This allows the cost to be based primarily on the services and planning complexity involved rather than automatically increasing with the value of the client’s investments.

You can review our wealth-management services and transparent fee structure to learn what is included.

Why I Chose a Flat-Fee Model

At Vetoshko Wealth Management, the agreed-upon fee is stated in the advisory agreement and displayed on the client’s quarterly invoice. Clients can see what they are paying without calculating a percentage of their portfolio.

I believe trust begins with transparency, and transparency helps create lasting relationships between advisors and their clients.

I also believe an advisor’s compensation should reflect the advice, planning and ongoing services being provided, not simply the amount of money a client has accumulated.

This does not mean every AUM advisor provides poor value or inappropriate advice. Many advisors who use AUM pricing take their fiduciary responsibilities seriously and provide valuable services. It does mean consumers should understand the financial incentives created by any compensation arrangement.

Understanding Potential Conflicts

No compensation structure eliminates every potential conflict of interest.

Consider a retired client who wants to give $15,000 to each of four grandchildren. Before recommending how to fund the $60,000 gift, the advisor should evaluate the client’s cash flow, taxes, investments and estate-planning objectives.

Under an AUM arrangement charging 1%, removing $60,000 from the managed portfolio would reduce the advisor’s annual revenue by approximately $600. That does not mean the advisor will provide inappropriate advice. Nevertheless, it creates a financial incentive that should be disclosed and managed.

With a flat fee, the advisor’s compensation ordinarily would not change because the client withdrew the $60,000. This can reduce that particular conflict, although the recommendation must still be based on the client’s circumstances and best interests.

Questions to Ask a Financial Advisor

Before hiring an advisor, ask:

• Is the advisor fee-only?
• Does the advisor charge a flat fee, an AUM fee or both?
• What services are included?
• How much will the fee equal in actual dollars?
• Can the fee increase, and under what circumstances?
• Does the advisor receive commissions or third-party compensation?
• What potential conflicts exist, and how are they managed?
• Is tax-return preparation included, charged separately or not offered?
• How frequently will the financial plan be reviewed?

The answers should be understandable before you sign an advisory agreement.

Vetoshko Wealth Management provides financial planning, tax planning, tax-return preparation and investment management through a transparent flat-fee wealth-management structure.

Schedule a complimentary 30- to 45-minute consultation to learn whether Vetoshko Wealth Management may be the right financial-planning partner for you.

This material is provided for general educational purposes and should not be construed as individualized investment, tax or legal advice.

Sources

• Investor.gov: Subscription-Based Advisory Fees
• Investor.gov: Investment Advisers
• NAPFA: What Is Fee-Only Financial Planning?

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