By Dr. Jim Dahle, WCI FounderOver the years, I occasionally find myself defending something I never expected to have to defend. This has included investing in stocks, investing in real estate, financial advisors, index funds, bonds, 401(k)s, earned income, insurance agents, and unconventional asset location decisions. This post is going to be a little bit like those.
I'm actually mostly anti-AUM fees, but the pushback against them has gotten out of hand—and it's time for something to be said.
Advisors Deserve the Anti-AUM Criticism
The first thing I need to do is to make clear that I am absolutely NOT defending the typical “financial advisor” out there, giving crummy advice for way too much money. Most “financial advisors” are product salespeople giving terrible “advice” in exchange for commissions. The highest commissions tend to be paid by the worst products, so the incentive to do the wrong thing is just too high for even a good person to resist for long. There is no price low enough for bad advice.
Even those few “real” advisors who are actually giving good advice are usually charging too much. One percent of assets under management might be a fair fee when you're managing $300,000. It certainly is not when you're managing $3 million, much less $30 million. It's a ripoff for the clients because capable advisors are out there willing to do just as good a job for $5,000-$15,000 a year.
AUM Is Fee-Only
Some people don't seem to realize that AUM fees are fees. They say dumb things like, “I want a fee-only advisor, not one that charges AUM fees.” Or worse, they say they want a “fee-based” advisor, even though that term means the advisor charges fees and commissions. Guess what? If your advisor only makes money from fees, they're fee-only—whether those fees are charged on an hourly basis, as an annual subscription, or as an AUM fee.
More information here:
How to Negotiate Lower Advisory Fees
Advice-Only Is a Validator Model
The next thing people say as they get educated is, “OK, fee-only isn't good enough. You need an ‘advice-only' model.” Advice-only is a model where you just pay the advisor to tell you what to do. You then have to actually do it. Well, that model works fine for a certain type of investor that we'll call validators. These are folks who aren't quite confident and educated enough to do it themselves but who are capable of following directions and showing a little discipline. They want to check in with an advisor every year or two or three to make sure they're on track.
You know why the “advice-only” model is so rare? Because it's hard to stay in business. It's very transactional. An advisor needs a constant flow of new clients because the ones they have don't need them all that much and not for all that long. They're mostly not building long-term relationships here either, so it is often not as gratifying for the advisor. They have to charge so much an hour to keep the doors open that nobody wants to pay it, even if it is much less than what a typical delegator (someone who has an advisor to take care of everything) pays.
Worse, lots of people who are actually delegators pretend they're validators because they're cheap. They get the advisor's advice and then don't do squat with it until they come back to see the advisor 18 months later without any insurance, without a will, and with all their money still sitting in cash. Neither the advisor nor the client is doing well when that happens.
The advice-only model is fine for the right type of client but not for all clients. DIYers struggle to understand this. They can't understand why anybody would want to pay someone thousands of dollars a year to do a little financial planning and maintain a portfolio consisting of a handful of index funds. That does not change the fact that those people (delegators) actually exist and need to be served well to avoid a lot of financial catastrophes.
Do the Math
The biggest problem among delegators is that too many of them aren't willing to do a basic math equation once a year. It isn't hard to calculate your fees when you are paying an AUM fee. You multiply your assets under management by the asset under management fee. If you have $700,000 and your fee is 0.9% of AUM, then your fee is $6,300 this year and hopefully more next year.
Guess what? That's a fair price.
But in a few years, it won't be unless you do something. For example, let's say you now have $3 million and the advisor charges 1% for the first million, 0.9% for the second million, and 0.8% for the third million. Now, you're paying $27,000 a year for financial planning and investment management. And there are good advisors out there willing to do it for $12,000. Now, you're being ripped off since you refuse to do a math equation once a year and negotiate a little or change to a new advisor. I don't want to say you're getting what you deserve, but there's a little bit of truth to that.
Why Do Advisors Charge Outrageous AUM Fees?
Why are all of these advisors ripping off clients? Four words.
- Because
- Clients
- Pay
- Them
Seriously, that's it. It's good business. When you're in business, you charge what people are willing to pay. We're in business here at WCI. We charge as much for ads as we can find businesses willing to pay. If we're charging too much, people stop buying them, and we have to lower the prices or not get any income at all. It's a constant balancing act.
It turns out an AUM fee business is a GREAT business. Sure, when you first pick up your clients, they only have $300,000 or $1 million or whatever. But for the next 20-50 years, they're only getting wealthier. And most of them are very sticky. They don't like this money stuff, so they don't do a simple math equation every year, they don't negotiate, and they certainly don't want to go find another advisor.
You don't need very many clients like that to have a viable solo financial advising practice—50-100 families is plenty. If they average $1 million in assets and you're charging 1%, 75 families generate $750,000 in revenue. If $250,000 goes to overhead, the advisor earns $500,000 in profit. That's a nice living.
But that's not the way it starts. It starts with 20 families with an average of $350,000 in assets. That's only $70,000 in revenue. That's really lean, and you're certainly not hiring any help. But as the years go by, you fill the practice with 100 clients and they become richer and richer and richer. When those clients average $2 million, that's $2 million in revenue for the practice each year. Maybe $500,000 is going to overhead now, and you're taking home $1.5 million. It'll be even more next year if the market doesn't crash and not too many people fire you after reading this article (delegators don't tend to read financial blogs like this one).
Why would you change your model now? Even if you lose a handful of clients a year, the other 95 will easily send you five more to replace them. And you feel like you deserve it because you remember how hard you worked during those lean years to find 100 families willing to not do a math equation every year.
Defending AUM Fees
“Wait, I thought you were going to defend AUM fees. It doesn't sound like you're doing that at all.”
All of the above had to be said before I got into today's topic: reasonable AUM fees. Guess what? We all already pay AUM fees. They might be called “expense ratios,” but that's exactly what they are. If you invest in the Vanguard Total Stock Market Fund like I do, you're paying Vanguard (Gerry O'Reilly and his team) 0.03% of the assets under management each year. If you have $10,000 invested, that's $3. If you have $100,000 invested, that's $30. If it's $1 million, it's $300. If it's $10 million, it's $3,000.
It's an AUM fee, so don't get all high and mighty that you don't pay AUM fees. You do, unless you're only investing in those Fidelity Zero Expense Ratio Index Funds, which probably aren't any better than the Vanguard index funds despite the minimally lower expense ratios.
What's the difference? The difference is that you're paying a REASONABLE AUM fee. The problem with AUM fees isn't that they are AUM fees. The problem is that they are often not reasonable. However, that does not mean they cannot be reasonable.
Lots of DIY investors talk about my friend Rick Ferri as though he's a saint. He actually is kind of a saint, but he also used to charge AUM fees in his practice. That fee was dramatically lower than 1% a year, but it was an AUM fee. DIYers often tell people to go to Vanguard Advisory Services. Guess how it charges its clients? That's right, an AUM fee. It's 0.35% and don't expect much financial planning, much less anything physician-specific.
More information here:
Leaving a Bad Financial Advisor
Managing a Lot of Assets Is Risky
It's perfectly fine to pay a flat fee for ongoing asset management. If you're paying $10,000 a year, it's about the same amount of work to manage $400,000 as it is to manage $3 million. Ten thousand dollars is a fair price for either one. But what about $30 million? Is $10,000 a fair price to pay for asset management of $30 million? I would argue that it is not. No, it may not be dramatically more complicated to manage $30 million than $3 million, but it's probably somewhat more complicated—and it is definitely much more risky. The financial planning is likely to be a lot more complicated, too. People with $30 million have lots of different accounts and complicated asset protection concerns and estate planning needs. Unlike most financial advisory clients, they've got an estate tax problem and probably some trusts. They should cost a little bit more.
But how much more? Well, that's hard to say.
Some of the flat fee advisors I know don't actually charge any more for those clients. That may be fine when you only have one or two of them. But what about when you have 25 of them? You can no longer run a profitable practice when all that extra effort is expended. But what if an advisor charged $12,000 a year to do financial planning and asset management of up to $8 million, then 0.15%-0.3% above that? Would that be a fair price? I think it would.
At $30 million, they'd be paying something in the range of $47,000-$78,000 a year. Yes, that's a lot of money. But so is $30 million. When an advisor makes a mistake managing assets, the clients generally expect them to make it right. That correction often comes out of the company's profits. The more money being managed, the more those mistakes cost. At a certain point, it becomes worth it for the advisor to make a claim against their errors and omissions (E&O) insurance. You better believe the cost of that insurance goes up as assets under management grow. Shouldn't that cost be passed along to the investor? Of course it should.
The Bottom Line on AUM Fees
I hope all of that rambling was helpful to you. I want to make sure WCIers walk away from this post with a little bit of new knowledge. Let me summarize it:
- AUM-charging advisors are fee-only advisors.
- The AUM model is not inherently unfair, although it is much easier to abuse.
- Reasonable AUM fees are fine to pay, but you must do the math each year to ensure they are still reasonable.
- Not every potential client is a validator, much less a DIYer. Many are delegators. Deal with it. Don't tell your delegator friends to be DIYers. It doesn't work. You're hurting them. Just send them to delegator-serving advisors who charge a fair price for good advice.
- If you become very wealthy, you should expect to pay more for financial planning and asset management.
- Being your own financial planner and investment manager is still the best-paying hobby in the world, especially when you become very wealthy.
What do you think? Why does the AUM model draw so much flak? If you have an advisor, do you pay an AUM fee? Why or why not?
Another argument for AUM fees is access to investments otherwise not available, such as blue chip PE (Bain, etc.).
Also, we’ve talked about direct indexing and donating appreciated tax lots to a DAF, which would be cumbersome do DIY.
I’m not sure you need to pay an AUM fee to do direct indexing or donation of appreciated tax lots to a DAF. That could all be done for a reasonable flat fee or subscription model. But those doing direct indexing are doing it for as little as 10-12 basis points these days. That’s $10 a year for a $10,000 investment. Pretty darn close to free.
The problem that I have with AUM fees is simply that the advisor’s compensation goes up, often times due to the client simply saving more. This is especially true in a down year, “well everyone is losing money this year,” true, but I also didn’t need to pay you an AUM fee to lose money, and in this year, I’m going to give you another large chunk of savings at the end of the year, so enjoy the AUM fee increase in the midst of the otherwise down year. After a certain AUM, growth in advisory fees should largely be based on investment yields only. It make sense to pay a full AUM fee if the investment gains in a given year, due to the prowess of the advisor, exceeds your annual physician job salary for example, with a large portfolio. But for the vast majority of physicians, as they build their net worth, the bulk of their net worth increases are coming from organic savings and sane spending habits, neither of which the AUM advisor should be rewarded for.
We also live in a very index fund heavy culture, and most savers in this country have a simple set it and forget it mentality, and as you mentioned, a simple annual check in would do for most investors to stay on track. The SP500 index gain for the year should ultimately be the benchmark. And yes, sometimes you do get access to private investment vehicles not available to other folks, but the exit / yield on those investments are highly unclear and opaque. I had a chat with a private client wealth management advisor at my bank for a portion of our brokerage account assets (approx. $1.5M) last year (about 2% AUM under 1M, 1% above 1M), and the first proposal they sent me was 65% fidelity index funds. I reached out telling them how silly it was for me to pay an AUM fee for them to index over half my money, which is what I do now anyway, and they said yes, this is not the strategy for you -> next proposal had a series of private “growth” funds with ERs 5 to 10x what you normally see. What if I hadn’t asked? Where’s the accountability? I’m obviously not stupid – I’m giving you a spare $1.5M that I saved via my highly technical job I spent 13 years in school / training for. I also explicitly asked for recommendations on a gold allocation due to inflation / fiscal deficit / de-dollarization concerns, but they wrote that off as an atypical investment “not right” for most portfolios. Isn’t being actively managed supposed to find creative ways to make me wealthier? I’ve made quite a bit of money on my gold / silver investment this year, and all I did was use boring ETFs to do that. The point is if I am paying 1% flat AUM to you, and gold is up > 40% this year, you should give that investment some thought and get me a piece of that action, regardless of that investment’s typicality in a normal portfolio. I understand my experience is not the standard for all AUM advisors, but I do worry that many investors out there are not getting their money’s worth.
I agree most investors aren’t getting their money’s worth, but I disagree that an advisor that uses index funds for your portfolio should be avoided. That’s what you should be looking for. Just pay a fair price for it. You don’t hire an advisor to beat the market for you. If they had the ability to do that, they wouldn’t be managing just a few million for you.
I saw the headline and thought for a moment it was April 1st!
Say you’ve been a DIYer your whole career for 25 years and retire. Most of your investments are index funds. You’ve accumulated $7M. I would hate to see the retiree giving up $70k a year to an advisor to manage index funds. I’d rather see the retiree spending that $70k living, enjoying life and taking vacations.
Hopefully you’re getting a heck of a lot more (and paying a lot less) out of that “$70K” than index fund management. That management and behavior control is worth something (a few thousand a year), but not $70K. But there’s a lot more to having a real financial advisor than portfolio management.
There are some helpful insights here, but there are some missing pieces related to advice-only financial planning:
1. “Advice-only is a model where you just pay the advisor to tell you what to do. You then have to actually do it.”
Many advice-only financial planners also include collaborative implementation in their service, such as screen sharing to help you make trades, initiate account transfers/rollovers, etc. It’s the “teach a man/woman to fish” model, but that doesn’t mean they just tell you what to do and say, “good luck!”
2. “They want to check in with an advisor every year or two or three to make sure they’re on track.”
Advice-only financial planning is available as hourly, project-based, or ongoing services. This article appears to assume that advice-only means limited-term engagements. There are subscription (montly ongoing) service models for advice-only.
3. “It’s hard to stay in business. It’s very transactional.”
This is a common misconception. Advice-only has proven to be profitable, sustainable, and even scalable. And it can actually be much less transactional than delegator service models since it requires a deeper relationship focused on personalized education.
4. “That’s a fair price.”
The value (and complexity) of a financial planning relationship has much less to do with portfolio size. Although $700,000 at 0.9% ($6,300 fee) sounds like a better deal than $3 million at 0.8-1% ($27,000), neither of those dollar amounts reflects the value of the advisory relationship (including time or expertise). $6,300 might be a great deal if the advisor is meeting regularly and helping with both quantitative and qualitative elements of the comprehensive planning process, but it can also be an absolute ripoff if they’re throwing your investments into a model portfolio, focusing solely on performance, and sending an annual birthday card.
5. “Your fee is $6,300 this year and hopefully more next year.”
This is accurate if the goal of working with the advisor is only to grow the portfolio value. But this is also an incentive within the AUM compensation model: the advisor is incentivized to grow the portfolio even if that isn’t the client’s objective, potentially in conflict with increasing retirement spending, giving, and debt repayment.
Disclaimer: I am an advice-only financial planner and advocate for how the model serves different clients differently, but I am not accepting any new client relationships (I haven’t since 2024).
1. I agree that most advice only folks will help you implement, but that’s still different than a typical delegator relationship. You’ve got to at least be somewhat of a validator for advice only to work for you.
2. Agree, sorry if I gave the impression that ongoing assistance is not available. I did not mean to.
3. We’ll have to disagree there. Validators are significantly harder to serve than delegators. Still worth trying to serve them as I actually think the majority of investors are validators.
4. The going rate for good (full) service from a financial planner and investment manager right now is something in the $7500-15000 range. If you’re not getting full service, you should be paying less. If you’re paying more, you can probably find someone that will do just as good of a job for less money.
5. Yes, as noted in the article, that’s an issue (perhaps THE issue) with an AUM model.
Not surprised you’re full. This is the biggest problem with getting good financial advice. By the time you learn about a high quality advisor, you usually can’t hire them. I can’t tell you how many of our prior financial advisor advertisers here stop buying ads simply because they filled their practice. 75-100 families is about what an advisor can effectively do. If they’re not trying to grow the practice with some sort of associate advisors, they’re usually only with us for 2-3 years. It doesn’t do any good to keep referring people to advisors who are already full.
Thank you for your kind reply!
If you’re interested in meeting two scaling advice-only financial planning firms, I recommend Abundo Wealth (monthly ongoing) and Nectarine (hourly and project-based). They are growing like crazy with intentions to keep scaling beyond 10,000+ annual client relationships.
If they’re interested in serving and marketing to doctors, feel free to send them our way. If our list ever starts feeling too short, we’ll consider reaching out. I worry about it being too long more than being too short.
I don’t know Abundo at all but I’m not sure Nectarine knows the doctor specific stuff (student loan management, multiple retirement account situations, asset protection concerns) as well as I like to see. I think it’s more aimed at the general population.
Jim: I think you are too negative about the Vanguard personal select service. They charge 0.3% and save me a lot of time to cycle and do my academic work. They do most of my essential financial planning and their investments have averaged 9% in a diversified portfolio. They recommended emphasizing international funds this year, with the sector now up 20%. I would say most of their limitations are structural in that they cannot manage my employer’s 403B plan (Vanguard funds that are unfortunately managed by TIAA) and can’t service my donor’s fund. They offer very good retirement planning and do include things like Roth conversions, provide SS and Medicare advice. Their specialized wealth advisors are only available with $5 million of investment and so you may not hit those levels (and may not need this) until you retire and consolidate funds. The wealth advisors provide specialized services on estates, trusts, taxes, etc.
Vanguard personal select services:
Custom investment and financial planning strategies.
A dedicated Certified Financial Planner™ (CFP®).
A personalized plan based on 30+ data points specific to you.
A tax strategy that addresses Social Security, Roth conversions, and account withdrawal order in the context of your spending needs and legacy goals.
I’m curious to hear about the financial planning (not investment management) done by your advisor at Vanguard PAS. My impression is there isn’t much of it happening from others I’ve talked to.
Vanguard personal select service has a helpful retirement planner that is developed and updated with a knowledgable CFP. It tracks automatically our 4 sources of income and the expected cash flow in future retirement from 7 retirement funds and two brokerage accounts. It estimates inflation and lets you plan future spending and projects effects of retirement timing, social security timing and withrawal sequences with probability ranges out to age 100 (gulp). It is helpful to see income going up after retirement with a 3% draw. It is actually amazing to see SS will start at >$100,000 at age 70. The CFP stays in Vanguard guidelines, but lets me know how founder investments in a startup and family real estate projects might influence income and taxes. We planned for Roth conversions with cost and return projection software. The CFP is especially helpful in explaining family finances and planning with my spouse who hates thinking about money and stock risks.
One thing we are seeing is having your advisor cap their fees. Don’t wait for them to suggest it, because they won’t. Even when you mention it, they will give reasons why their firm doesn’t do it etc. Like anything else, when you push them, they will do it.
Example, 0.70% capped at $40,000 or some other number that you feel is right for the services you are using.