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The assets under management (AUM) fee model has long been the cornerstone of financial advisory services, providing advisors with a simple and scalable revenue stream. As the industry evolves and client expectations shift, there’s growing debate about whether this model serves clients’ best interests or is simply a relic of the past.
With the advent of artificial intelligence (AI) in financial services, the pressure to move away from the AUM model is mounting. Has the time come for you to rethink your approach to compensation?
The limitations of AUM-based fees
While AUM-based fees have provided a reliable income stream, they are increasingly seen as problematic for a number of reasons:
Conflict of interest: The AUM model can create conflicts of interest. Advisors are incentivized to grow assets under management. This may discourage you from recommending actions that could reduce AUM, like paying off debt, making large charitable donations, or even purchasing a home.
Disproportionate fees: The AUM fee structure can result in disproportionately high costs for clients with large portfolios. A client with a $10 million portfolio might pay significantly more than a $1 million portfolio, even if the work involved in managing both portfolios is similar.
This discrepancy can lead to client dissatisfaction, especially among high-net-worth individuals who are more fee-conscious.
Limited appeal to younger clients: Millennials and Gen Z, who are in the wealth accumulation phase but may have fewer investable assets, might find AUM fees unappealing. These generations may prefer fee structures that align more closely with the services they need – like financial planning and budgeting – rather than being charged based on asset levels.
The impact of artificial intelligence: Artificial intelligence is rapidly transforming the financial services industry, and its effects on fee structures could be profound. AI-powered tools can now perform many of the tasks traditionally handled by financial advisors, like portfolio management, risk assessment, and personalized financial planning. As these tools become more sophisticated and accessible, they will likely drive down the perceived value of services tied to AUM-based fees.
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Dan’s new book for millennials, Wealthier: The Investing Field Guide for Millennials, is now available on Amazon.
Here’s what one advisor said: "Saplings grow into trees. We need to help the next generation of investors get to where they need our services."
For more information, visit the website for Wealthier:
To review Wealthier send an e-mail to: [email protected]
AI-driven efficiency and transparency: AI can offer greater efficiency and transparency in managing client portfolios. Automated investment platforms (robo-advisors) already offer diversified portfolios with minimal human intervention at a fraction of the cost of traditional financial advisors.
As AI continues to improve, the value proposition of paying a percentage of assets for portfolio management will likely diminish. Clients may increasingly question why they should pay a significant fee for services that can be largely automated.
Alternative fee structures
Given the shifting landscape, consider alternative fee structures that align more closely with the value you provide:
Flat fees: Charging a flat annual or monthly fee can better align with the actual work performed and offer more transparency. This model is particularly attractive for clients who value predictability.
Hourly fees: Billing clients for the time spent on their financial planning needs could create a more equitable relationship and eliminate the conflicts inherent in AUM-based models. This approach can also appeal to clients with varying levels of wealth, making financial advice more accessible.
Subscription models: Similar to how software companies charge for ongoing product access, subscription models can provide a steady income stream and appeal to clients who prefer predictable costs. This model is gaining traction, particularly among younger clients who are accustomed to paying for services on a subscription basis.
Resistance to change
Despite the clear advantages of alternative fee structures, many advisors remain reluctant to abandon the AUM model. Several factors contribute to this resistance:
Fear of revenue loss: The transition from AUM to another fee structure could initially lead to reduced income.
Client education: You may worry about the challenge of explaining new fee structures to clients who are used to the traditional model.
Industry norms: The financial advisory industry is steeped in tradition, and change can be slow. You may fear being seen as an outlier or disrupting the status quo.
Adapt or die?
The real question isn’t whether the AUM model will disappear. It’s whether advisors who stick to it will thrive. As AI advances and clients become more educated and fee-conscious, the demand for more transparent, fair, and aligned compensation structures will only grow.
Now is the time to evaluate your fee structure critically. Are you serving your clients in the best possible way, or are you relying on a model that may soon be obsolete?
Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Here’s what one advisor said: "Saplings grow into trees. We need to help the next generation of investors get to where they need our services."