Flat fee vs AUM: understanding advisor pricing models

Flat fee and assets-under-management (AUM) pricing are two common ways financial advisors charge for their services. While both models can be used to deliver financial planning and investment advice, they differ in how fees are calculated, how they change over time, and how incentives are structured.

Understanding these differences can help investors evaluate costs, expectations, and tradeoffs before choosing an advisor. This page explains how each model works, where they tend to differ, and why neither approach is inherently right or wrong in every situation.

What is AUM pricing?

Assets-under-management (AUM) pricing is a fee structure where an advisor charges a percentage of the assets they manage on a client’s behalf. The fee is typically calculated annually and deducted directly from investment accounts on a monthly or quarterly basis.

Under an AUM model, the dollar amount a client pays changes as the value of their portfolio changes. When markets rise or additional assets are added, the fee increases. When markets decline or assets are withdrawn, the fee decreases. The percentage itself usually remains constant, but the cost in dollars fluctuates over time.

AUM pricing most often includes ongoing investment management, such as portfolio construction, rebalancing, and day-to-day oversight. Many advisors also include financial planning services within the AUM fee, though the scope of planning can vary by firm and should be clearly defined.

This model is widely used in the advisory industry and is often viewed as simple to administer, since fees are automatically adjusted and paid directly from managed accounts rather than billed separately.

What is flat fee pricing?

Flat fee pricing is an approach where an advisor charges a set dollar amount for advice, rather than calculating fees as a percentage of investment assets. The fee is agreed upon in advance and is typically based on the scope of services being provided rather than portfolio size.

Unlike AUM pricing, flat fees do not automatically rise or fall with market performance. Changes to the fee usually occur only if the services provided change, such as adding complexity, expanding planning needs, or shifting from a one-time engagement to ongoing advice.

Flat fee arrangements can include a range of services. Some advisors focus solely on financial planning and advice, while others include ongoing investment management as part of the flat fee. Because pricing does not determine service scope, it’s important for investors to understand exactly what is included before comparing costs.

This pricing model is often chosen by investors who prefer predictable costs or who want to separate the price of advice from fluctuations in portfolio value, though its suitability depends on individual circumstances and expectations.

How fees change over time

One of the key differences between flat fee and AUM pricing is how costs evolve over time. While both models can start at a similar dollar amount, they tend to behave differently as markets move and financial situations change.

With AUM pricing, fees rise and fall alongside the value of the portfolio being managed. As investment balances grow, the dollar cost of the fee increases, even if the scope of services remains the same. During market declines, the fee decreases, though the percentage charged typically stays constant.

Flat fee pricing behaves differently. The fee is typically stable and does not change simply because markets rise or fall. Some advisors may adjust flat fees periodically, such as to account for inflation or changes in service scope, but these adjustments are usually explicit rather than automatically tied to portfolio value.

Neither approach is inherently better. Some investors prefer the simplicity of fees adjusting automatically with account values, while others value the stability and transparency of a fixed advisory cost. Understanding how fees change over time can help clarify which model aligns more closely with personal preferences and expectations.

Incentives and alignment

Discussions about flat fee versus AUM pricing often focus on incentives and how advisor compensation is structured. Because the two models calculate fees differently, they can create different financial dynamics between an advisor and a client.

Under an AUM model, compensation is directly tied to the value of the assets being managed. As portfolio values increase, the advisor’s fee increases in dollar terms. With flat fee pricing, compensation is typically tied to the scope of services provided rather than portfolio size, and does not automatically change with market performance.

It’s important to separate incentive structure from professional responsibility. When working with a fiduciary advisor, the compensation model should not determine whether investment management or financial advice is delivered competently or in the client’s best interest. Fiduciary advisors are obligated to act in their clients’ best interests regardless of how they are paid.

In practice, both pricing models can support high-quality investment management and advice. The key distinction is not whether an advisor is paid a flat fee or an AUM fee, but whether the advisor clearly explains how they are compensated, what services are included, and how decisions are made on the client’s behalf.

Investment management and ongoing service

One area where confusion often arises is how investment management fits into different pricing models. Pricing structure alone does not determine whether investment management is included, how it is delivered, or how involved an advisor is on an ongoing basis.

Under an AUM model, ongoing investment management is typically included by default. This often covers portfolio construction, rebalancing, monitoring, and day-to-day oversight of managed accounts. Financial planning services may also be included, though the depth and frequency of planning can vary by firm.

With flat fee pricing, investment management may or may not be included. Some flat fee advisors focus exclusively on planning and advice, leaving implementation to the client. Others provide ongoing investment management as part of the flat fee. Because of this variation, investors should not assume that flat fee advice automatically means self-management or that AUM pricing guarantees a broader scope of planning.

Regardless of pricing model, what matters most is clarity around services. Investors should understand whether investment management is included, how portfolios are managed, how often recommendations are reviewed, and what level of ongoing support to expect. These service details are separate from how fees are calculated and should be evaluated independently when choosing an advisor.

Cost comparisons

Comparing costs between flat fee and AUM pricing can be challenging, because the total cost of advice depends on several factors beyond the pricing model itself. Portfolio size, service complexity, and the scope of ongoing support all influence what an investor ultimately pays.

With AUM pricing, costs scale with the value of managed assets. As portfolios grow, the dollar amount paid in fees increases, even if the services provided remain largely unchanged. For some investors, this automatic scaling feels simple and hands-off, since fees adjust without separate billing or renegotiation.

Flat fee pricing tends to be more predictable. Because fees are set in advance, investors can more easily understand and plan for the cost of advice over time. Adjustments to flat fees typically occur only when services change or when advisors apply explicit increases, such as for inflation, rather than as a direct result of market performance.

Neither model is inherently more or less expensive in every situation. For investors with smaller portfolios or highly complex planning needs, a flat fee may result in higher or lower costs depending on the services included. For investors with larger portfolios and simpler needs, AUM fees may represent a higher long-term cost. Meaningful comparisons require looking beyond the fee structure alone and understanding what is being provided in return.

Who each model tends to fit best

Flat fee and AUM pricing models can both work well, but they often appeal to different preferences and situations. Understanding these tendencies can help investors frame the decision more clearly, without assuming that one approach is universally better.

AUM pricing tends to fit investors who want ongoing investment management included as part of the advisory relationship and prefer fees that adjust automatically as account values change. For investors with smaller portfolios, AUM fees may also be relatively low in dollar terms, which can make this model more accessible early on. The level of client involvement can vary widely and is driven more by the advisor’s service model than by the pricing structure itself.

Flat fee pricing often fits investors who want clearer separation between the cost of advice and the size of their portfolio. It may appeal to those who value predictable costs, have more complex planning needs, or prefer to evaluate advisory fees independently of market performance. Investors using flat fee arrangements may be highly involved or largely hands-off, depending on whether investment management is included and how the advisory relationship is structured.

Ultimately, the fit depends less on labels and more on expectations. The right model is the one that aligns with how an investor wants advice delivered, how involved they want to be, and how clearly they understand what they are paying for and receiving in return.

Choosing between flat fee and AUM

Choosing between flat fee and AUM pricing is less about finding a universally better model and more about understanding how each approach fits a specific situation. Both models can support high-quality advice and investment management when delivered by a fiduciary advisor.

Rather than focusing solely on how fees are calculated, investors are better served by asking practical questions. What services are included? Is investment management part of the relationship? How often are recommendations reviewed? How does the advisor communicate changes, decisions, and tradeoffs over time?

It’s also important to understand how fees may evolve. Some investors prefer costs that adjust automatically with account values, while others value predictability and explicit changes tied to scope or inflation. Neither preference is right or wrong, but being clear about expectations can prevent misunderstandings later.

Ultimately, pricing is just one part of the advisory relationship. Clarity, transparency, and alignment matter more than the specific fee structure. Understanding how flat fee and AUM pricing work makes it easier to evaluate advisors on the things that truly affect long-term outcomes.