Hiring a Flat-Fee Advisor, Part 2: How Do Flat Fee Advisors Charge?

Now that the service models are clear, it’s important to consider the fees in more detail. Even among ongoing service models, “flat fee” can mean many different things. Here is a summary of the most common flat-fee approaches.

Tiered based on AUM

The advisor assigns a flat annual fee according to a range, or tier, in which the client’s investable assets fall – for example, they might charge $10,000 for portfolios below $1,000,000, $15,000 for portfolios between $1,000,000 and $2,000,000, and so on. Unlike a traditional percentage-of-assets charge that varies each quarter, the fee generally changes only when the portfolio crosses a tier boundary.

Pros: It is easy to understand, gives clients more predictability than a continuously calculated AUM fee, and may roughly align price with the responsibility of managing a larger portfolio.

Cons: It still ties the advisor’s compensation to asset levels, and so leaves the advisor exposed to the conflicts of interest inherent in AUM pricing. It may also create abrupt fee increases at tier thresholds and does not necessarily reflect the actual complexity or amount of work required.

Based on income or net worth

The annual fee is set by placing the client into a pricing band based on household income, net worth, or a combination of the two. The rationale is that financial capacity and planning complexity often rise together.

Pros: This approach can account for assets beyond the portfolio being managed, may be practical for high earners who have not yet accumulated substantial investments, and produces a stated fee rather than a percentage that changes every day. It also reduces some of the conflicts faced by AUM fees because it doesn’t only charge on managed assets.

Cons: Income can sometimes fluctuate dramatically, clients may need to disclose extensive financial information just to obtain a quote, and the measure is still a very imperfect proxy for complexity or service needs. It can also feel like charging based on ability to pay rather than the services delivered.

Custom for each client

The advisor evaluates factors such as the number of accounts, tax situation, business ownership, estate-planning needs, portfolio complexity, and expected service demands, then proposes an individualized annual fee. Some advisors use a strict formula, while others simply make a judgement call.

Pros: Pricing can closely reflect the work involved, accommodate unusual circumstances, and avoid forcing very different households into the same category.

Cons: It is less transparent before the discovery process, makes comparison shopping more difficult, and may leave clients wondering why another household pays a different amount. The fee can also become subjective unless the advisor uses a clear and consistent framework, potentially leading the advisor to fall back on a fee that approximates an AUM fee, rather than one that truly reflects work or complexity.

Single flat fee

Every client pays the same stated amount for the same ongoing service package, regardless of portfolio size, income, net worth or other factors. This is the simplest interpretation of flat-fee pricing.

Pros: It is highly transparent, predictable, easy to compare, and avoids direct pricing incentives tied to a client’s assets or earnings.

Cons: A single price may overcharge households with relatively simple needs while undercharging those with significantly more complex situations. Advisors may need strict eligibility standards or limits on scope to make the fee work for both clients and the advisor.

Tiered based on services

Clients select, or are assigned to, a service package with a defined scope depending on the needs of the client. This is similar to the single flat fee approach, but for a firm that is looking to accommodate a broader set of clients.

Pros: The fee is directly connected to what the client receives, rather than AUM, and can make differences between service levels more transparent and easier to understand than a custom approach.

Cons: Packages may be difficult to compare across firms, important needs may fall outside a lower tier, and clients may not know in advance which services they will require.

Fee Increases

Unlike AUM fees, flat fees do not automatically rise when the market rises, which generally benefits clients. However, advisors’ operating costs increase over time, so firms may eventually need to raise their stated fees.

Some advisors have automatic adjustments built into their agreements that stipulate increases annually based on a benchmark like CPI. Others do ad hoc fee increases over time. Either way, you’ll want to understand when, why, and by how much your fee could increase in the future.

Which is the right flat fee approach?

Compared to commissions or AUM fees, flat fees have potential to provide three primary benefits:

1. Transparency – when a fee is stated in dollar terms, rather than a percentage, it gives the fee nowhere to hide. Flat fees do that. However, some methods of calculating flat fees – particularly the custom approach – make things a little bit less transparent and harder for consumers to see what they are paying and why.
2. Reduce conflicts of interest – when advisors offer comprehensive financial advice, there are many instances where advice may lead to an increase or decrease in the size of a client portfolio (such as rolling over a 401k or paying off debt). Fees that are tied to the size of a portfolio create a material conflict of interest when advising on these sorts of issues. Fee models that are not tied to portfolio size reduce these conflicts. A tiered fee based on AUM clearly violates this ideal. A tiered fee based on income or net worth also faces potential conflicts, as does a custom fee that lacks a transparent formula.
3. Fairness – The term “fair” is obviously subjective, but I use a practical standard here: clients receiving similar services should pay similar fees. AUM, income, and net worth are crude proxies for complexity or service needs; I have worked with many $1 million clients whose needs were nearly identical to those of $3 million clients. A custom fee can be the fairest model when it follows a clear, consistent framework, but it also creates the greatest opportunity for opaque pricing. Single flat fees and service-based tiers appear fairer on the surface, although firms still need to define their scope of service carefully so that all clients receive comparable value.

In short, fee models based on AUM, income, or net worth just don’t measure up to the primary benefits of flat fees. In fact, it could easily be argued that a fee that varies based on financial factors shouldn’t be referred to as “flat” at all. While these models may be improvements over traditional percentage of AUM fees, due to increased transparency and somewhat reduced conflicts, they still retain significant conflicts and could lead to clients paying dramatically different fees for similar services.

Custom fee models have potential to be the best of both worlds – giving the client just the right fee for their situation and the advisor fair compensation for the service given. However, as previously mentioned, custom fees can be easy for advisors to abuse – using black box formulas that end up charging very similar to their AUM counterparts and quickly losing many of the advantages of flat fees.

For these reasons, single flat fee, a tiered fee based on services, or a transparent service-based formula seem to offer the best combination of minimizing conflicts of interest and maximizing transparency and fairness. Those are big wins for investors.

That said, there is no perfect fee model. They all come with pros and cons, both for advisors and their clients. The most important thing is that you understand what you are receiving and what you are paying for that service. The right fee for you depends on your needs and preferences.

Ready to turn what you’ve learned into a smarter advisor search? Read Part 3 for practical search terms, advisor directories, and questions to help you find and vet the right flat-fee advisor for your needs.