The Smarter Way to Pay Your Financial Advisor
Most investors have no clue how much they actually pay their financial advisor. That’s not an accident—it’s by design. The financial industry has built a system that benefits advisors at your expense, and it’s time we talked about it.
The standard model—Assets Under Management (AUM) pricing—is fundamentally flawed. But at least AUM advisors are a step up from the real bottom-feeders: commission-based “advisors” who are essentially salespeople in disguise.
These commission jockeys push whole life insurance, variable annuities, and fixed annuities because they generate massive upfront commissions—sometimes 5-10% of your investment. They’re not advisors; they’re product peddlers dressed up in suits, one step above used car salesmen. The only difference is they’re selling financial products that lock up your money for decades instead of vehicles that lose value the moment you drive them off the lot.
Even if you manage to avoid the commission crowd, the AUM model still creates problems. Here’s why, and what you should demand instead.
The AUM Problem
Under the AUM model, your advisor charges a percentage (typically 1-2%) of the assets they manage for you. Sounds reasonable until you realize the perverse incentives this creates.
Your advisor gets paid more when they manage more of your money. That’s the problem right there.
Your goal is to build wealth and achieve financial freedom. Your advisor’s goal, under AUM pricing, is to keep as much of your money under management as possible. These goals aren’t always aligned—and when they conflict, guess whose interests usually win?
A Better Way: Net Worth-Based Pricing
Smart advisors are abandoning AUM for a more sensible approach: charging based on your total net worth, not just the assets they manage.
Net Worth = All Your Assets – All Your Debts
Everything counts: your investment accounts, retirement funds, real estate, business interests, savings, minus your mortgage, student loans, credit cards, and other debts.
Why Net Worth Pricing Works
1. True Alignment of Interests
With net worth-based pricing, your advisor only makes more money when your overall wealth increases. Period.
Doesn’t matter if that wealth grows through the investments they manage, your business, real estate appreciation, or debt paydown. If your net worth goes up, their fee goes up. If it stays flat or declines, so does their compensation.
This is how it should work.
2. Eliminates Conflicts of Interest
The AUM model creates constant conflicts. Let me give you some real examples:
Scenario 1: Debt Paydown You have $500,000 invested with an advisor charging 1% AUM ($5,000/year). You want to pull out $300,000 to pay off your mortgage.
- What’s best for you: Pay off the debt, eliminate interest payments, reduce risk
- What’s best for your AUM advisor: Keep that money invested so they don’t lose $3,000/year in fees
Scenario 2: 401(k) Rollover You retire with $1 million in your 401(k) that has excellent, low-cost investment options.
- What’s best for you: Leave it in the 401(k) to benefit from institutional pricing
- What’s best for your AUM advisor: Roll it over so they can manage it and collect $10,000/year in additional fees
Scenario 3: High-Interest Debt You have $100,000 invested earning 8% and $50,000 in credit card debt at 18% interest.
- What’s best for you: Use $50,000 of investments to eliminate the guaranteed 18% loss
- What’s best for your AUM advisor: Keep managing that $50,000 to maintain their fee revenue
With net worth-based pricing, these conflicts disappear. Your advisor gets paid the same whether you pay off debt, keep money in your 401(k), or move assets around. Their only incentive is to help your total wealth grow.
3. Complete Transparency
You know exactly what you’re paying. No buried fees in fund expense ratios. No quarterly surprises when market volatility changes your AUM fee.
Just a clear, fixed monthly amount based on your net worth, recalculated annually.
4. Real Financial Planning
The AUM model focuses advisors on investment management because that’s what drives their revenue. But comprehensive financial planning involves much more:
- Debt optimization
- Tax strategy
- Insurance planning
- Estate planning
- Cash flow management
- Business planning
With net worth-based pricing, your advisor benefits from helping you in all these areas because they all impact your overall wealth.
How It Works in Practice
At our firm, we calculate your net worth and apply a percentage fee that typically ranges from 0.2% to 0.6%, depending on complexity. For someone with a $1 million net worth, that might be $4,000 annually, or about $330 per month.
We recalculate annually based on your updated net worth. If your wealth grows, our fee grows proportionally. If it declines, so does our compensation.
The Real Question
Ask yourself: Do you want an advisor whose financial success depends on keeping your money under their management, or one whose success is tied to your overall financial progress?
The answer should be obvious.
What to Do Next
If you’re working with an AUM advisor, have a conversation about their fee structure. Ask them directly:
- How much did I pay you last year?
- Would you recommend I pay off my mortgage if it made financial sense, even if it reduced your fee?
- Do you support leaving money in my 401(k) if it has better options than what you offer?
Their answers—and comfort level with these questions—will tell you everything you need to know.
The financial industry is slowly moving toward more transparent, aligned pricing models. The question is whether you’ll wait for your advisor to catch up, or find one who’s already there.
Your wealth is too important to leave in the hands of someone whose interests aren’t fully aligned with yours.
