Many advisors charge an “Assets Under Management” (AUM) fee based on a percentage of your assets. The logic seems sound – if the value of your account goes up then the advisor benefits, and if the value drops then the advisor shares the pain. How could this model cause problems?

 

This week I have spent time revisiting how I explain the benefits of my flat retainer fee pricing model. Since many fee-only advisors charge you based on your account balances, let me share three areas where this model could work against you:

  • It can influence decisions. Several important decisions at retirement affect the size of your nest egg. Should you pay off your home? Should you exchange assets for more guaranteed income? Should you take the lump sum from your pension? The answers you choose can have a significant impact on your remaining account balance and thus the AUM advisor’s compensation!
  • It ignores complexity. Let’s compare two clients. Client A has a straightforward financial situation, while Client B deals with inheritances, complicated family dynamics, and estate planning issues. It seems illogical to charge them the same amount for advice just because they have the same account balance, right?
  • It penalizes wealthier clients. Why should a client with $5 million pay so much more than a client with $1 million? There are some additional complexities with more money, but not enough to justify such a price difference. Does your doctor charge you based on the value of your home?

The $500,000 Difference

The difference between a typical 1% advisory fee and the III Financial flat retainer fee can add up to a significant difference over several years. For a $1,000,000 portfolio, using simplified assumptions (a 7% average return on a portfolio and no withdrawals) you would have about $450,000 LESS in your account at the end of 20 years when paying the 1% advisory fee!

Don’t get me wrong – the AUM model has stuck around for many years because it works in some cases. However, for someone near or in retirement who has more than $500k, an annual retainer could make a huge difference in the money you have to spend!

If you want to learn more about what your financial advice might be missing, you can download my free report “The 5 Things Your Financial Advice May Be Missing”!

 
 

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