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Clockwise, from top right: Samantha Russell, Rick Ferri, Max Schatzow and Diana Britton

Can AUM-Based Advisors Be True Fiduciaries?

During a recent Inside Wealth panel, advisor Rick Ferri argued that AUM-based advisors aren't incentivized to put clients first, while attorney Max Schatzow stressed advisor compensation for 'value' isn't easily quantified. Either way, advisors should expect more client scrutiny over the price of advice.

Financial advisors who charge clients a percentage of assets under management are too often susceptible to conflicts of interest between their business model and what's best for their clients, argued Rick Ferri, an investment analyst and founder of Ferri Investment Solutions.

For services other than portfolio management, an AUM-based fee can be incompatible with being a true fiduciary, Ferri argued during a panel discussion at this week’s Inside Wealth Virtual conference.

Financial planning services are often independent of the size of the portfolio managed, and should be compensated differently, in a flat fee or hourly structure, he said. Advice that adds to the size of the managed portfolio will too often take precedent over what may be more prudent strategies, like paying off loans. Portfolio management and financial planning "should be two separate line items" on the client's bill, he said. As it is, advisors charge on average 1% of assets under management, with an ever-smaller basis point share going to portfolio management.

After all, if markets go up 20%, so do advisors' fees, but not necessarily the work they perform for that client, according to Ferri's argument.

But Max Schatzow, an attorney with Stark & Stark who focuses on advisor regulations and compliance, cautioned that time spent on a client's plan is an important, but not necessarily the only, barometer of what advisors should be charged.

The two were joined on the panel by Samantha Russell, a marketing services consultant with FMG Suite. ( was a co-sponsor of the Inside Wealth event.)

Ferri said advisory fees can quickly balloon when the amount of AUM for a particular client rises, even when that fee is set at 1%.

“The advisor fee needs to be aligned with the amount of time the advisor spends advising, rather than the amount of money a client has under management,” he said. “It gets way out of whack and we’re supposed to be fiduciaries in this business, and that means keeping clients’ costs down, including our own fee.”

Ferri said that advisors’ biases toward increasing AUM may not be apparent but could nevertheless guide them to make recommendations based on what would boost managed assets, as that would have a direct impact on their own revenue. Ferri described a hypothetical client with a $1 million rollover from a previous 401(k); as a fiduciary, Ferri believed the right advice for this client would be to roll that into their current 401(k), assuming it is a good one.

“But if you’re doing AUM, you’re not going to recommend that, because you’re not going to want to watch $10,000 walk out the door based on your own recommendation,” Ferri said. Additionally, advice to pay off mortgage debt of other loans may be the right move for a client, but as it may require diverting money from investment accounts, it's unlikely an AUM-based advisor makes the recommendation.

There was nothing wrong with questioning the value of an advisor's services, Schatzow said, but "value" has multiple meanings depending on the client. In addition to time spent, Schatzow said advisors could consider how knowledgeable the investor was and how complicated their financial picture could be.

“I think value should be the focus of the whole relationship between an advisor and their client,” he said. “But value doesn’t mean you should charge the least lucrative amount of fee you can earn possibly in any given market.”

Russell said advisors need to be prepared for more scrutiny from investors with increasingly deeper knowledge of financial planning and what they are paying advisors. 

“With certain things over time, as consumers become more equipped to understand these different fee models and there’s more of a discussion about it, whatever you’re charging will be questioned more,” she said.

Russell pointed to the increasing number of alternative fee models in the RIA space, many subscription-based. While the subscription model mirrors broader consumer services, she said advisors should offer a variety of options to clients.

“For people who paid the AUM fee for a long time, it can be a hard pill for them to swallow to all of a sudden see and feel that fee, from a psychological perspective, if they’d never seen it before and if it just got taken off the top of the investments,” she said.

On the regulatory front, Schatzow said the SEC was taking a closer look at fees, but that their focus tended to be on hidden fees and costs, like 12b-1 fees and third-party charges that are not fully disclosed. When it came to fee transparency, Schatzow said that disclosure, if done right, can mitigate conflicts. 

“A lot of people defend the unsophisticated investor, and act like investors are so unsophisticated and say they don’t understand these things,” he said. “They definitely get these disclosures and they understand them when they enter an arrangement,” he said. “I find it hard to believe someone’s going to walk in, ask for financial advice, have no idea what they’re paying, and trust their advisor for 10, 20 or 30 years."

Ferri agreed clients were getting more sophisticated, and as they do, more will see the AUM-based pricing structure isn't aligned with the services they are getting, and turn to advisors with alternative fees structures that more closely align with the real value they provide, he predicted.

“You do have biases as an advisor,” he said. “You’re measuring things based on money that comes in and money that goes out.”

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