Why more advisors are choosing flat fees over AUM

At an AICPA conference on June 11, two financial advisers argued that flat-fee pricing can align adviser pay with planning and advisory work better than a percentage-of-assets model. David Blain, founder and CEO of BlueSky Wealth Advisors in New Bern, North Carolina, and Andy Panko, founder and financial planner at Tenon Financial in Metuchen, New Jersey, outlined alternatives and trade-offs.

Blain presented two client examples to illustrate a mismatch between AUM fees and work performed: a single investor with a large portfolio and minimal planning needs, and a married couple with no investable assets but complex planning requirements. He told the conference that AUM fees reflect a past era when investment management made up most adviser work and may not match firms that focus on financial planning and tax advice. “If mostly your value is asset management, AUM might be the thing for you,” he said.

Panko described three flat-fee approaches. Time-based fees charge by the hour. Scope-based fees set a fixed price for a defined project. Capacity-based fees scale with the complexity of the task, which Panko associated with the time, resources and skill required. He characterized complexity as the factor that determines how much work a case needs.

Both presenters listed advantages and disadvantages. Hourly pricing can offer flexibility and help clients see how charges are calculated, but it can discourage clients from contacting advisers and raise concerns when routine work is done by junior staff. Flat fees or retainers provide more predictable recurring revenue for firms and clearer billing for some clients. Panko identified younger, high-income clients who have limited investable assets as one group that can fit flat-fee models.

Panko estimated roughly 50 firms now use flat-fee pricing, up from about five he knew of in 2019. Practical steps discussed included defining scope tiers so fees match expected work and increasing flat fees for inflation; Panko said he adjusts fees annually using the Consumer Price Index for All Urban Consumers (CPI-U). He also described targeting a narrow client segment-clients near or in retirement with moderate assets and manageable complexity-and turning away prospects who do not fit that profile.

Both advisers warned that no fee model is free of conflicts. Panko noted that no fee model is unbiased, and Blain emphasized the importance of charging clients consistently within a firm.

For decades, many registered investment advisers charged a fixed percentage of assets under management. As financial planning, tax planning and advisory work occupy more adviser time, some firms are reassessing whether asset-based fees reflect the services they deliver.