Financial Planner: The Assets Under Management Fee Structure Is ‘Broken’
Brent Weiss knows the financial services industry well. Prior to co-founding Facet Wealth, a company that provides virtual financial planning from certified financial planners (CFPs) at an affordable price point, he ran a wealth management firm for just over a decade.
“Most financial advisors charge based on how much money they manage,” Weiss explains. This is known as the assets under management (AUM) fee structure, in which advisors take a certain percentage, typically 1%, of the assets that they’re managing for you. That means, as an advisor, “if you’re managing $1 million and you’re charging 1%, someone is paying you $10,000 a year.”
There’s a problem with this fee structure, says Weiss: “There’s zero alignment between cost and value. I charged this way for 10 years and realized, it’s a broken system.”
He gives the example of two clients he had, both with about the same amount of money: One was a retired teacher with a simple financial situation. “I never had to touch his money. I almost didn’t have to do anything for him,” Weiss recalls. The other was a small business owner with 10 employees. Needless to say, the business owner’s finances were much more complex and required more of Weiss’ time, yet both clients paid the same amount of money, as the fee structure was based solely on how many assets they had.
“How is that fair?” asks Weiss. “How is it fair that I’m doing less work for one, but am charging the same amount?”
At Facet, Weiss and his co-founders use a different fee structure: They charge a flat fee, ranging from $1,200 to $6,000 a year.
Two factors go into the cost: The first is financial life stage. After all, “a 40-year-old couple married with two kids is going to have a different situation than a 60-year-old couple who are empty nesters looking at retirement as compared to a 28-year-old who is single, figuring out what a pay stub is and what employee benefits are,” explains Weiss.
The second is financial complexity. The amount a client pays depends on things like their income level, existing assets, liabilities, whether or not they’re a business owner, etc. “All of these individual facets of their financial landscape are factored in to figure out: OK, how much work are we going to have to do to put together a plan that’s personalized for them?”
The more complexity, the more the client will pay.
With this model, Weiss’s retired teacher who didn’t need much guidance with his money would pay much less than the business owner with 10 employees.
And that’s a more fair model, says Weiss: “It’s the business model that should have been around for the past 30 or 40 years. However, the wealth management industry found a way to make a lot of money. Their margins are ridiculously high and people would pay it.”
Facet, along with other financial advisors charging flat fees — rather than using an AUM fee structure or earning commissions — are trying to break that trend.
Part of the problem with charging based on assets is that it incentivized advisors to work with high-earners who had a lot of money for them to invest. “Most financial advisors establish a minimum,” Weiss explains. “They’ll say, You have to have at least $250,000 or $500,000 or $1 million in order to work with us. That becomes prohibitive. Think about how many American households don’t have that kind of wealth yet.”
To address that cost barrier, Facet doesn’t require a minimum account balance to work with one of their certified financial planners.
Facet’s advisors also don’t earn commissions.
Some financial advisors are “commission-based,” meaning they can make money whenever they sell you certain securities, annuities or other insurance products — and their earnings, which can be anywhere from 1-6% of your investment, come straight out of your wallet.
This is more of an outdated fee structure — most financial advisors have moved away from it because of the conflict of interest it can create. The professionals who still earn commissions are typically “hybrid advisors,” meaning they may earn commissions in addition to charging a fee on the assets they manage.
“We’ve built a business model so there are no conflicts of interest,” says Weiss. “There’s no incentive for one of our advisors to say, You need this insurance policy or this annuity, because they’re not making any money off of it.”
The no minimum requirement, combined with the flat fee structure, is meant to make high-quality financial planning more accessible to mainstream America, which is Weiss’s mission: “I believe that the 90% that have lacked access to financial planning for decades deserve access to it.”