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Flat fee vs AUM

A flat fee is a set dollar amount. An AUM fee is a percent of the account, billed again each year. Item 5E names the method. The brochure names the price.

The short answer

A flat fee is a set dollar amount for a plan, a month, or a year. An AUM fee is a percent of the money they manage. AUM means assets under management. The firm bills that percent again each year, so the dollar amount moves when the account moves.

Item 5E on Form ADV records which methods the firm uses. The brochure and the contract record the price. If a quote is 1% a year, $500,000 costs $5,000 this year. The same 1% on $1,000,000 costs $10,000. Your brochure may show a different rate, or a rate that drops when the balance is higher. Those dollar lines are the math of a 1% quote. They are not a national average.

Flat feeAUM fee
Item 5E box5E(4) fixed fees. Hourly work is 5E(2).5E(1) percent of assets
The billDollars you can read onceA percent, then dollars that change with the balance
If the market rises and you add nothingThe quoted dollars stayThe fee rises with the account
If you take out a large sumA project fee usually stays as quotedThe percent applies to what is left
Where the number livesBrochure and the letter that sets the jobBrochure schedule

A flat fee is not the same thing as fee-only. Fee-only is about whether commissions are in the model. Flat versus AUM is about how your fee is calculated. A firm can be fee-only and still charge a percent of assets. See fee-only vs fee-based.

What to do

  1. Open Search and open two firm pages that could do the same job.
  2. On each ADV panel, record Yes or No for 5E(1) and 5E(4). Also note 5E(5) commissions. The whole checklist is Item 5E.
  3. Open the fee section of the brochure (Part 2A). Copy the percent, the points where the rate drops, and any fixed planning fee. Part 1A will not contain your rate.
  4. Turn the percent into dollars with the advisor fee calculator. Use your balance, not a round number from an ad.
  5. Ask each firm, in writing: "What will I pay in dollars over the next 12 months on my current balance? What is extra, such as a plan update, tax work, or fund expenses? Do you bill at the start of the period or after it? Does your pay rise if I invest more with you?"
  6. Compare those two written quotes to the work. A lower dollar fee that skips the decision you need is not the cheaper hire. Is a financial advisor worth it? is that question.

What to look for on Best Investors

  • Two Yes boxes at once. Firms often mark both a percent of assets and a fixed fee, because different services use different bills. The contract has to say which bill is yours.
  • 5E(1) without a rate. The checkbox never shows 1% or 0.8%. Only the brochure does.
  • 5E(4) without a dollar figure. "Fixed fees" can be a $2,000 plan or a much larger retainer. The word "fixed" is not the price.
  • Item 5I wrap programs. A wrap fee bundles advice and trading into one charge. It can look like a single percent and still be a different contract. See Item 5I.

Common mistakes

  • Comparing "1%" to "$3,000" without turning the percent into dollars on your balance.
  • Ignoring the schedule. A rate that starts at 1% and falls on the next million is not a flat 1% on every dollar.
  • Assuming a flat fee means the firm refuses commissions. Check 5E(5) and the conflict pages in the brochure.
  • Assuming an AUM fee means the firm is paid only by you. Run the same check.
  • Forgetting a bill that is charged at the start of the quarter. Ask what you get back if you leave in the middle.
  • Treating fund expense ratios as included. They sit on top of either fee. Name them when you compare two total costs.

Related questions

Is 1% the normal AUM fee?

It is a number people hear. It is not a rule, and it is not a box on Form ADV. Your schedule might be higher, lower, or stepped. Use the percent in the brochure, then multiply by your balance. The $5,000 figure on this page is 1% of $500,000. It is not a survey of what firms charge.

Can a firm charge a flat fee and an AUM fee?

Yes. A one-time plan fee plus an ongoing percent is a common pair. Item 5E will show more than one Yes. Make the agreement say which fee covers which service, so you do not pay twice for the same meeting.

Which fee has the worse conflict?

They are different conflicts. AUM pay rises when more of your money stays with that firm, and when markets lift the balance. A flat fee does not rise that way, so the risk shifts toward a narrow job. Read the services section before you pick on price alone.

Where do I see hourly, if the choice is not really flat?

Hourly is Item 5E(2), not 5E(4). If the firm bills by the hour, get the rate and a cap in writing before the first meeting. The fee calculator can turn hours into dollars.

Limits

This page does not tell you which fee to accept, and it is not legal or investment advice. Best Investors is not the SEC.

The firm filled out Item 5E. Those boxes are not a price list, and we do not audit the rate in the brochure. If our page and IAPD disagree, use IAPD.

The dollar examples use a rate you must confirm in the brochure.

Sources

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