The Financial Advice Business Is Changing. Its Fee Model Should Catch Up.

For most of the last century, the business of financial advice was primarily an investment business. First, it was a product business: brokers were paid commissions to sell stocks, bonds, insurance, and packaged products. Then, as the profession evolved, it became an asset-management business: advisors increasingly charged an ongoing fee based on assets under management, or AUM, instead of getting paid every time a trade happened. That was real progress. It reduced the incentive to churn accounts, encouraged long-term relationships, and moved many firms closer to a fiduciary mindset.

But the profession has changed again. Today, the most valuable work many advisors do has less to do with picking investments and more to do with helping people make complex financial decisions. Retirement timing. Social Security claiming strategies. Tax-aware withdrawal plans. Debt repayment. Equity compensation decisions. Insurance analysis. Estate coordination. Cash-flow planning. Behavioral coaching in volatile markets. In other words, financial advice has shifted from being investment-focused to planning-focused. And if that is true, the fee model should shift as well.

The old commission model had obvious flaws. A broker paid only when a transaction occurred had a built-in incentive to generate transactions. That often meant product sales were prioritized over client outcomes, and certain products carried especially powerful economic incentives. The move away from commissions toward fee-based relationships was one of the industry’s biggest improvements. It helped advisors build ongoing relationships instead of episodic sales interactions, and it aligned compensation more closely with long-term client success.

The rise of AUM pricing made sense in that environment. If the advisor’s job is primarily to manage a portfolio, charging as a percentage of the portfolio is intuitively appealing. It is easy to understand, simple to bill, and generally more aligned than transaction commissions. As Michael Kitces recently noted, however, even as the definition of advice broadens, “86% of advisory firms still rely on AUM fees as their primary method of charging for advice,” while more firms are beginning to unbundle planning and investment services into project, hourly, or retainer arrangements (Kitces Research, 2025).

The issue is that the investment landscape itself has changed. The spread of low-cost index funds and exchange-traded funds made portfolio implementation cheaper, simpler, and more commoditized. Investors no longer need to pay active-management prices just to gain diversified market exposure. And the long-term evidence for active outperformance remains weak. S&P Dow Jones Indices’ SPIVA research continues to show that over longer horizons, most active managers underperform their benchmarks; for year-end 2024, there were no U.S. equity categories in which a majority of active managers outperformed over 15 years. That does not mean investment management has no value. It means the advisor’s value proposition increasingly rests somewhere else.

Even Vanguard, one of the firms most associated with low-cost indexing, has been explicit about where advisor value comes from. In its Advisor’s Alpha framework, Vanguard argues that trust is not built on “expert securities selection or timing the market,” but through relationship-oriented services such as financial planning and behavioral coaching. In a 2022 update, Vanguard wrote that “the most significant opportunities present themselves not consistently but intermittently,” especially when advisors keep clients from making costly mistakes during moments of fear or euphoria. That is a planning-and-coaching value proposition, not an investment-picking one.

And that is exactly why the AUM model deserves a fresh look. AUM fee works reasonably well when compensation is tied to the investment-management function. But when it becomes the default way to charge for comprehensive financial planning, it introduces a new set of conflicts. Any recommendation that increases managed assets can increase firm revenue. Any recommendation that reduces managed assets can reduce it. That is not a theoretical issue; it is embedded in many of the most important planning decisions advisors help clients make.

Consider a few examples. Should a client use excess cash to pay down a mortgage or invest it in a managed account? Should they leave assets in a 401(k) or roll them into an IRA the advisor manages? Should they spend more in retirement, gift more to children, fund a charitable trust, delay retirement, claim Social Security later, or hold more cash than an optimizer would prefer? Nearly every one of those decisions can affect the amount of money billed under an AUM arrangement. The advisor may still act honorably and give sound advice, of course. But the compensation structure is no longer neutral relative to the recommendation.

The profession already recognized once that a change in the nature of advice required a change in how advice was paid for. Moving from product sales to fiduciary-style investment advice required a shift away from commissions. Now the profession is moving from investment-centric advice to comprehensive planning. It should not be surprising that this shift also calls for new fee models.

That does not mean there is one perfect replacement. There isn’t. Every compensation method creates tradeoffs. Hourly fees can make clients hesitant to call. Project fees can discourage ongoing engagement. Flat retainers need to be priced thoughtfully so that firms are sustainable and clients feel they are getting value. There will always be tension between what consumers want to pay and what professionals need to charge to deliver high-quality service.

Still, alternatives to pure AUM pricing often do a better job of matching the service being delivered. Hourly fees can work well for targeted advice. Fixed project fees make sense for one-time planning engagements such as retirement-readiness analyses or second-opinion reviews. Ongoing flat or retainer fees can be especially well suited to households that need continuous planning, coordination, accountability and investment management. These models can also expand access to advice for people whose financial complexity is high even if their investable assets are not.

Importantly, these approaches have one advantage that deserves more attention: they are less sensitive to the recommendation itself. If an advisor is paid the same whether a client pays down debt, leaves money in a workplace plan, spends more in retirement, or transfers assets to heirs, the advisor has a greater chance of being perceived as impartial. No fee model eliminates every conflict, but a planning fee that is based on the scope and complexity of the planning work is often better aligned with planning than a fee based on the size of an investment account.

None of this requires the industry to abandon AUM fees altogether. For clients who want portfolio management without comprehensive planning advice, AUM may continue to fit. But the default assumption that comprehensive planning should be paid for primarily through a percentage of assets deserves to be challenged. The business has changed. Advisors increasingly earn their keep by helping clients make better decisions, avoid mistakes, coordinate across disciplines, and stick to a sensible course of action. That is planning. And if planning is now the core value being delivered, the fee model should reflect it.

If advisors want consumers to see financial planning as a trusted profession rather than a distribution channel, the industry must embrace pricing models that better reflect the work, reduce avoidable conflicts, and feel fair to the people being served.