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Hourly advisor vs AUM advisor

Hourly pay stops when the work stops. A percent of assets keeps billing while the account stays. Price both offers in dollars before you pick.

The short answer

An hourly adviser bills for time. When the meeting and the follow-up hours are done, that bill stops. An AUM adviser bills a percent of the account. AUM means assets under management, the balance the percent applies to. That bill comes again next year while the agreement is in force and the assets stay.

The two bills create different pressures. Hourly pay grows when the work runs long. A percent grows when the account is larger, and it continues while you remain a client. Neither pressure is a reason to skip the person. It is a reason to see the dollars.

A set fee for a project is a third arrangement. That comparison is on flat fee vs AUM.

HourlyPercent of assets
Form ADV boxItem 5E(2)Item 5E(1)
When the bill stopsWhen the hours you agreed to are finishedWhen you end the agreement or the assets leave
The pressureA longer meeting costs moreA larger balance, and another year, costs more
FitsOne question, a plan, a second opinionSomeone watching the account on a schedule you accept
What you ask forThe rate, which hours count, and a capThe rate, the dollar amount on your balance, and where the rate steps down

What to do

  1. Open Search and open the firm. Write down every Yes under Item 5E. A firm can check both hourly and percent of assets. You still need to know which one is the offer in front of you.
  2. Read the fee section of the brochure (Form ADV Part 2A). Copy the hourly rate if it is printed. Copy the percent and any balance where the percent changes.
  3. Turn the percent into dollars on your balance. A 1% quote on $500,000 is $5,000 this year. On $1,000,000 it is $10,000. Your quote may use another rate. These lines are the math of a 1% quote, not a survey of what firms charge. The advisor fee calculator will use the rate from the brochure.
  4. For the hourly offer, multiply rate times hours, and ask for a cap. If they will not name a rate, you do not have a price yet. Do not fill in a rate from memory or from another firm.
  5. Email both questions in one note: "What will this cost in dollars if we stop after this project? What will it cost in dollars for the next 12 months if the account stays?" Keep the reply with the brochure page.
  6. Pick the clock when you want a defined job. Pick the percent when you want the firm on the account after the meeting, and you have seen the annual dollars.

What to look for on Best Investors

  • Item 5E(2) and Item 5E(1). These boxes say the firm uses that method somewhere. They do not say which method applies to your account. The brochure and the proposal do.
  • Item 5E(4) fixed fees. A project price or a monthly planning retainer often sits here, not in the hourly box. Item 5E(3) is the newsletter category. Do not read a retainer into 5E(3).
  • The brochure schedule. Look for a cap on hours, a minimum bill, and whether travel or "research" is extra. On a percent schedule, look for billing in advance or after the period, and whether the fee is taken from the account.
  • Item 5G. Services tell you what the firm says it offers. A percent fee does not by itself mean you get a written plan.

Common mistakes

  • Comparing an hourly quote for one meeting with a percent quote for a year of portfolio work. Price the same job both ways, or admit you are buying two different jobs.
  • Treating "fee-only" as the same fact as "hourly." Fee-only is about commissions. Hourly is about the clock. See fee-only vs fee-based.
  • Assuming the hourly adviser has no conflict. The conflict is shorter: more hours, a higher bill. Ask which tasks are inside the cap.
  • Leaving an AUM agreement in place after the work you wanted is done. The percent does not expire at the end of the plan.
  • Inventing a "normal" hourly rate because the firm would not write one down. No rate on the page means you do not have an offer.

Related questions

Can one firm charge both?

Yes. Item 5E is a list of methods the firm uses, not a single box for your household. Ask which method applies to the planning work and which applies to the portfolio, and get both numbers in dollars.

Is a flat fee the same as hourly?

No. Hourly moves with the clock. A flat fee is a set dollar amount for a scope, a month, or a year. If the scope grows, ask whether the flat fee still holds. The hourly page and the flat fee page answer different bills.

What if I only want a second opinion?

Buy hours, with a cap, or buy a fixed project. A percent on the whole account is a strange way to pay for one meeting. Say that in the email so the proposal matches the job.

Does the percent adviser work harder when the account is bigger?

You cannot see effort on the form. You can see that the bill rises with the balance. Ask what changes in the work when the balance crosses the next step in their schedule, and what stays the same.

Limits

This page does not pick hourly or a percent for you. It is not legal or investment advice, and Best Investors is not the SEC.

The firm filled out Item 5E. We do not audit the invoice. The $5,000 figure is 1% of $500,000. It is not a typical hourly rate and not a typical asset-based fee.

If this page and the brochure disagree, use the brochure. If the brochure and IAPD disagree, use IAPD.

Sources

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