The Truth About Financial Advisor Fees: Understanding AUM, Commission, and Flat Fee Models
When it comes to managing your wealth, understanding how your financial advisor gets paid is crucial. At Black Mammoth, we believe in complete transparency about our fee structure. Let's dive into the three main ways financial advisors are compensated: AUM (Assets Under Management), commission, and flat fee models. By the end of this post, you'll have a clear understanding of each model and be better equipped to choose the right advisor for your needs.
The Three Main Fee Models
AUM (Assets Under Management)
The AUM model is perhaps the most common fee structure in the financial advisory industry. Here's how it works:
"This one everyone is used to. This is a percentage of whatever assets that you have invested with that advisor."
Pros of AUM:
Easy for clients as fees are automatically deducted from accounts
Advisor's compensation is aligned with portfolio growth
Often includes comprehensive financial planning services
Cons of AUM:
Can be expensive for high net worth individuals
May not be accessible for those with limited investable assets
Potential conflict of interest when advising on using investments for large purchases
Commission-Based Model
In this model, advisors earn a commission on the financial products they sell to clients.
"Commission products are different. They could still be mutual funds. They could still be part of the stock market, except for you're probably going to have one of two shares, an A share or a C share."
Pros of Commission:
No ongoing fees
Can be less expensive for buy-and-hold investors
Cons of Commission:
Potential conflict of interest as advisors may recommend products with higher commissions
Upfront costs can be high
May not include ongoing financial planning services
Flat Fee or Subscription Model
This is the model we prefer at our Modern Family Office:
"Flat fee, very much, very easy to say. I'm going to charge you $100 a month, $500 a month, right? That's on the subscription side. I'm gonna charge you $5,000 a year, flat fee."
Pros of Flat Fee:
Transparent and easy to understand
No conflicts of interest related to asset management
Accessible to clients at all wealth levels
Often includes comprehensive financial planning
Cons of Flat Fee:
May feel expensive for those used to hidden fees
Requires ongoing budgeting for advisory fees
Why We Prefer the Flat Fee Model
At Black Mammoth, we believe the flat fee model aligns best with our clients' interests. Here's why:
Transparency "It's more transparent. It's more upfront. It's more, you know, is what it is."
Accessibility "It also allows a greater band of clientele, right? Because if you have a cashflow, you for that advisor or planner. If you don't have any assets, you can still do that, right?"
Reduced Conflicts of Interest "I say lesser because they're always going to be. Ultimately, if you hire someone to help you with your financial situation, it's not their money. So there's going to be inherent conflict of interest somewhere because you're paying them to do so. However, I think it's lesser when you go flat fee."
Understanding the Impact of Fee Structures on Your Wealth
Let's break down how each fee structure might impact your wealth over time:
AUM Model Example: Imagine you have $500,000 invested and your advisor charges 1% AUM. That's $5,000 per year, regardless of the services you use. As your portfolio grows, so does the fee.
Commission Model Example: If you invest $100,000 in a mutual fund with a 5% front-load fee, you're immediately paying $5,000 in commissions. Your investment starts at $95,000 before any market movements.
Flat Fee Example: You might pay $5,000 per year for comprehensive financial planning and investment management, regardless of your asset level. This fee remains constant whether you have $100,000 or $1 million invested.
The Importance of Understanding Your Advisor's Compensation
Knowing how your advisor is paid is crucial for several reasons:
It Helps You Understand Potential Conflicts of Interest
It Allows You to Accurately Compare Services
It Ensures You're Getting Value for Your Money
As I often say on our No BS Wealth Podcast:
"Ultimately, you want to work with one. And ultimately, you need one. In my honest opinion, everyone should have a financial planner. But the most important part is, how the hell do they get paid for what they do, ultimately?"
Questions to Ask Your Financial Advisor About Fees
What is your fee structure?
What services are included in your fee?
Are there any additional costs I should be aware of?
How often will we review your fees?
How do you handle potential conflicts of interest?
Conclusion
Understanding financial advisor fee structures is essential for making informed decisions about your wealth management. While each model has its pros and cons, at Black Mammoth, we believe the flat fee model offers the most transparency and aligns best with our clients' interests.
Remember, the right fee structure for you depends on your individual financial situation, the complexity of your needs, and the level of service you require. Don't be afraid to ask questions and seek clarity about how your advisor is compensated. After all, it's your financial future at stake.
For more insights on financial advisory fees and wealth management strategies, tune in to No BS Wealth Podcast. We're committed to providing transparent, valuable financial advice to help you achieve your financial goals.