Posted: 8/20/2024
The Case Against AUM-Based Fees
At PDS Planning, we believe you shouldn’t have to pay more for financial planning simply because you are worth more. Instead, we offer a flat, fixed-dollar fee that reflects our work rather than your net worth. Doing so allows us to provide you with a more effective financial planning experience that eliminates sales-based advice and conflicts of interest inherent to commission- and asset-based pricing models.
What is an AUM-Based Fee?
One way many – dare we say most – financial advisors charge their clients is the assets under management (AUM) fee model. The AUM-based fee is a percentage, based on the value of the individual’s investment portfolio. The average financial advisor fee is typically between about 0.5% to 2% per year but can vary based on how the financial advisors operate.
Financial advisors who use the AUM-based model may suggest that it is the “fairest” model because it is directly tied to the value of your assets. Therefore, as your assets increase, the dollar value of your fee does too. And if your assets decrease, so does the advisor’s compensation. Seems accurate, right?
Consider that AUM-based fees are closely tied to equity market returns and they have historically increased at a rate that is much, much higher than inflation. This means that advisory fees also automatically increase as you save and invest more, despite the fact there is almost no correlation with the work done or value provided by the wealth manager.
Do you really know how much you are paying your advisor under the AUM-based model? It’s hard to tell. Under this model, advisory fees are automatically deducted from your account and only later show up on your statement. We believe more people might reconsider these fees if required to write a check each quarter for their financial advice.
What Does Fee-Only Mean?
Fee-only planners like PDS Planning typically have fewer conflicts of interest, focus on advice, and can offer flexible payment models. Advisors who are fee-only generally put their clients’ interests first and thus carry a fiduciary responsibility because there are no commissions.
The fiduciary standard of care requires that a financial advisor act solely in the client’s best interest when offering personalized financial advice. By hiring a fee-only fiduciary investment advisor to manage your investments, develop a financial plan, or both, you are assured you alone are paying a financial professional who is legally and professionally committed to acting in your best interests.
What Are the Benefits of a Fee-Only Financial Advisor?
Fee-only financial advisors are paid only by you for the work performed on your behalf. This allows your advisor to act as a true fiduciary to do what is right for you. Among the benefits of fee-only include:
- Transparency
- No hidden charges
- No conflicts of interest to sell a certain product line or company offering
- More predictable costs
- A focus on advice rather than selling financial products
What Is the Difference Between Fee-Only and Fee-Based?
Despite similar sounding names, there is a significant difference between fee-only advisors and fee-based advisors. As previously mentioned, a fee-only financial advisor is paid directly by you for the services rendered. On the other hand, fee-based advisors are registered as both investment advisors and brokers, which means they can earn commissions for selling products, such as life insurance or annuities, to the same clients who pay them a fee for investment management services.
How PDS Planning is Different
At PDS, we embrace the true fiduciary responsibility we have to our clients. Our focus is on creating tax-efficient solutions to enhance our clients’ wealth, not our own. By charging our clients a flat, fixed dollar fee, we avoid the inherent conflicts of asset-based pricing models, which is the industry norm. It has been our experience that the compound effect of these savings over time can be substantial.
IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PDS Planning, Inc. [“PDS”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from PDS. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PDS is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the PDS’ current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.pdsplanning.com. Please Note: PDS does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to PDS’ web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a PDS client, please contact PDS, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.