Executive Summary
How advisory firms charge for financial advice has long been a central question in the profession. While many firms have historically relied on commission-based compensation methods – reflecting a sales-driven approach – financial advice has evolved with technological advancements and a greater focus on financial planning, with the Assets Under Management (AUM) fee emerging as the primary compensation model. Now, as financial advicers expand their services beyond traditional planning into more holistic, personalized advice, the very definition of financial advice continues to evolve. As a result, firms must continually reassess how they structure their fees to align with their growing range of services.
For firms evaluating pricing strategies, considering how others in the industry are adapting provides useful insights. Despite ongoing changes in the philosophy of financial advice, new Kitces Research on How Financial Advisors Actually Do Financial Planning finds that 86% of advisory firms still rely on AUM fees as their primary method of charging for advice. While this model remains widespread, firms have adopted different ways of structuring their AUM fees to align with their service models and client needs.
At the same time, AUM-based pricing is not without its criticisms. One common concern is that an advisor managing a $4M portfolio does not necessarily do twice the work of one managing a $2M portfolio, despite the fee being twice as high. However, most firms do not price their services in such a strictly proportional manner. Only firms using a flat fee structure, where a single rate applies to the entire portfolio regardless of size, use this kind of direct fee scaling. Instead, graduated and cliff pricing structures – which apply tiered or blended rates as assets grow – help balance costs across different client segments. These structures can also help advisors remain competitive on pricing, which may explain why 58% of firms use graduated fee structures, making them the most common pricing approach.
Despite its widespread use, AUM-based pricing has its limitations – it exposes firms to market risks and restricts the types of clients they are able to serve. To mitigate this, some firms 'unbundle' their fees, separating investment management, financial planning, and other services into distinct project-based, hourly, or retainer fees instead of covering everything under a single AUM fee. Notably, across nearly all client segments, research finds that the total fees charged by advisors who offer bundled and unbundled services tend to be nearly identical, suggesting that unbundling could be a viable way to make financial advice more accessible to clients with smaller portfolios. Another way firms reduce reliance on AUM fees is by using multiple charging methods, such as combining AUM fees with project-based or retainer fees. In fact, 72% of advisory firms use more than one charging method, allowing for greater flexibility in serving a broader range of clients.
Ultimately, as financial planning becomes more comprehensive and customized, fee structures are evolving to reflect this shift. While the mechanics of charging fees may not always change, the broader conversation around fees has continued to develop. At the same time, a wider range of fee structures could help firms serve a more diverse client base by expanding access to financial advice, which has traditionally remained concentrated in high-net-worth households. In other words, as financial planning becomes increasingly comprehensive, firms have the opportunity not only to refine their pricing models but also to rethink how they define – and deliver – value!
Last year, Mike Lecours, cofounder of FP Pathfinder, wrote about a framework he called Financial Advice 3.0, suggesting that financial advice had entered its third era. In his article, he outlined three distinct eras of financial planning. The first era was sales-centric, with commissions serving as the primary means of compensation and the client/advisor relationship being largely transactional. Then, as technology advanced and the field of financial advice matured, a second era emerged – one focused on building and delivering 'the plan'. It was during this period that the CFP marks and other industry credentials became more established, and modern planning software began to take shape. This second era of financial planning often focused on 'the plan' as a physical deliverable – often symbolized by an enormous binder containing the client's financial plan.
Now, as Lecours suggests, we've entered a third era of financial advice – one that shifts the focus "beyond the plan". If this era could be summarized in one word, it would probably be holistic. With technology continuing to streamline advisors' work, advisors are now able to leverage their expertise to help clients at a deeper level – going 'beyond the plan' – exploring how money impacts emotional well-being, life satisfaction, and overall alignment with values on a greater scale than ever before. (Though naturally, not all financial planning firms operate within this 'third era' framework – different clients have different needs, and firms tailor their services accordingly.)
And, of course, with this shift in financial advice comes shifts in how advisors charge for their advice.
How Do Financial Advisors Charge For Their Services?
The emergence of this third era of financial advice has also revealed a growing dichotomy within the financial planning field – between how advisors charge for their financial advice and what their financial advice actually entails. While the philosophy of what constitutes financial advice has evolved, the Assets Under Management (AUM) fee structure has endured as the standard pricing model used by financial advisors.
According to our 2024 Kitces Research on How Financial Advisors Actually Do Financial Planning, 92% of advisors incorporate AUM fees in some way, with AUM-based fees accounting for anywhere from 15%–99% of a firm's revenue. In fact, AUM has only grown more dominant as a primary charging method in recent years – our 2022 Kitces Research data found that 82% of advisors reported using AUM as their primary pricing method, which increased to 86% in 2024.
Despite the prevalence of AUM-based pricing fees, these fees rarely cover investment management alone. On average, 59% of a client's AUM is allocated to investment management, with the remaining 41% attributed to financial planning and other advisory services. In other words, a significant portion of an advisor's AUM fee is used to cover services beyond investment management – which, for some advisors, may be extensive.
As the figure below illustrates, the allocation of AUM fees varies based on whether financial planning is bundled into the fee structure. Advisors who do not bundle financial planning into their AUM fees attribute 73% of their fee to investment management, leaving just 27% for planning and other services. By contrast, advisors who bundle financial planning into their AUM fees allocate a lower 54% to investment management, dedicating a larger share (46%) to planning and additional advisory work.
This trend suggests that while AUM fees are likely to continue as a pricing model mainstay, their purpose is shifting to support the broader, more holistic and proactive approach that defines the third era of Financial Advice 3.0.
Despite the prevalence of AUM fees, criticism persists – both from within and outside of the industry – as the amount of work it ostensibly takes a financial planner to manage a $4M portfolio is not double what it takes to manage a $2M portfolio, despite the advisor earning double the fee. Yet, AUM remains dominant (and even grows) as a standard fee benchmark – not only because clients expect it, but also because they're willing to pay it. Of course, AUM fees aren't without drawbacks. For instance, AUM exposes firms to market risk and narrows the types of clients eligible to be served.
That being said, the notion of collecting double the pay for similar work is largely a myth. In reality, the 2024 Kitces Research on How Financial Advisors Actually Do Financial Planning suggests that most advisors decrease their AUM fees as portfolio size grows (and, conversely, increase their fees for smaller portfolios).
The graphic below demonstrates how this works in practice. The blended AUM fee (i.e., the average fee calculated across a portfolio's tiers regardless of whether it is billed on a flat, cliff, or graduated fee schedule), tends to decrease as a portfolio grows. Average fees (represented by the "Common Fees" shown as the darker blue band in the graphic below) that fall between the 25th and 75th percentiles of fee charges tend to average between 100 and 120 bps for portfolios that are less than $1M. As portfolios grow past $2M, the average fee ranges from 80 to 100 bps.
Put another way, while a client with a $2M portfolio might have a 100 bps advisory fee requiring them to pay a total of $20,000, a $4M client, despite being 'worth' twice as much, is more likely to have a fee of only 80 bps, paying $32,000. This represents a 40% fee increase for a 100% increase in assets! And while some of that fee undoubtedly goes to profit margin, the reality is that a $4M portfolio likely has more complexity, liabilities, and demands compared to a $2M one.
Bundled Fees Are A Result Of Advisors Charging More, Not Less
As advisors adjust fees based on a client's assets, the challenge also arises in explaining these differences to clients. One common approach is 'bundling', where an AUM fee encompasses more than just portfolio management.
Example: Two advisors, Susie and Calvin, each provide comprehensive financial planning services and have a client with a $1M portfolio.
Susie uses a bundled fee structure, charging her client a 1% AUM fee. She attributes 60% of that fee to asset management, with the remainder covering everything else. Susie's client pays a total of $10,000 for all services received.
Calvin uses an unbundled fee structure, charging his client a 0.6% AUM fee. He also charges a $1,000 retainer fee and a $3,000 planning fee. Calvin's client pays a total of $6,000 for asset management, for a total of $6,000 + $1,000 + $3,000 = $10,000 for all services received.
In the example above, Susie and Calvin both ultimately charge the same amount and may even perform the same services, but how they charged (and how they explain those charges to clients) differs greatly.
Notably, Kitces Research on Advisor Productivity suggests that across nearly all client segments, the total blended fees (that is to say, fees across portfolio tiers regardless of the size of an advisor's fee schedule) charged by bundled and unbundled advisors tend to be nearly identical.
The choice between bundled and unbundled fees can be particularly relevant for clients at either end of the asset spectrum: Lower-asset clients may prefer unbundled fees to control costs and pay only for what they need, while higher-asset clients may favor unbundled pricing if they perceive they're paying disproportionately high AUM fees for planning services they don't need. Additionally, unbundled fees give advisors a chance to highlight all that they do beyond 'just' asset allocation.
However, bundling can also provide benefits. The logistic complexity and potential psychological wear and tear of paying multiple fees can also be a detriment to clients. Bundling fees simplifies billing, ensuring clients remain fully engaged in the firm's entire experience without feeling like they're opting in (or out) of any particular service.
AUM Fee Schedules
According to 2024 Kitces Research on Advisor Productivity, the majority of financial advisory firms (66%) that charge AUM fees have some form of minimum asset requirement. Approximately one-third of them have minimums less than $500,000, one-third have minimums between $500,000 and $1,000,000, and the remaining third have minimums at or above $1,000,000.
Minimum asset requirements play a crucial role in business planning, allowing advisory firms to accurately assess business costs – especially when comparing the higher expenses of prospecting and first-year onboarding processes to the lower ongoing costs of servicing long-term clients. Since AUM-based firms recoup costs in their initial years over time, minimums help ensure long-term profitability.
However, minimums are not always strictly enforced – only 11% of firms strictly enforce their advisory fees, with 90% of firms reporting that they either occasionally or regularly waive their minimum requirements!
This isn't necessarily a bad thing. Some advisors intentionally waive minimums to serve lower-asset clients, particularly those who are likely to grow into higher-net-worth clients over time. However, if exceptions become frequent, it may be worth evaluating how to address potential revenue gaps when clients don't yet meet asset-based thresholds (discussed in more depth later).
AUM Fee Structures By Portfolio Size (And Fee Confidence)
As discussed earlier, as a client's portfolio grows, firms are more likely to lower their pricing from the 'traditional' 1% AUM fee. The following data from Inside Information's 2024 "Fees In Motion" report illustrates the wide range of AUM fees across portfolio sizes. The graphic below indicates the inverse relationship between portfolio size and AUM fees and affirms that $1M AUM is the general 'breaking point' for 1% AUM fees. For example, according to the survey, 62% of advisors charge at least 1% AUM on $1M portfolios. However, that is only true for 32% of $2M portfolios and continues to decrease in higher net-worth portfolios – and that number continues to drop as portfolio sizes increase. The chart demonstrates how dramatically low AUM fee levels get as portfolio sizes grow.
This variability is largely due to the different ways advisors structure their pricing tiers. There are three primary AUM fee structures:
- Graduated structures – Fees are calculated as a blended rate based on multiple tiers.
- Cliff structures – Once a portfolio reaches the next pricing tier, the new rate applies retroactively to the entire portfolio.
- Flat structures – A single rate is applied to the entire portfolio, regardless of size.
Both graduated and cliff structures provide flexibility that helps balance client fees for both smaller and larger clients. Lower-asset clients may pay slightly more than the firm's average, but not prohibitively so, and higher-asset clients benefit from discounted rates as additional dollars are charged at lower tiers.
Among these fee structures, graduated fee schedules are by far the most common, with 58% of advisory firms using this method as the basis of their pricing method according to Kitces Research on Advisor Productivity.
Notably, firms using graduated fee schedules charge approximately 0.1%–0.15% less than those using cliff fee schedules for portfolios of comparable size. This is particularly noteworthy given that cliff fee structures apply retroactively across all portfolio dollars – meaning that once a portfolio crosses into a new tier, the lower fee rate applies to the entire balance, not just the portion above the threshold. While this can reduce fees for clients, it also increases the risk of fee compression for firms, as larger portfolios may generate lower overall revenue compared to a graduated fee structure.
However, Kitces Research suggests the opposite is true – cliff fees appear to be correlated with both higher fee confidence among advisors and tighter niche focus, where firms are more likely to define a specific AUM range for their ideal clients. The graphic below contrasts how these cliff and graduated fee schedules apply to clients in real time using four-tier schedules (the median number of tiers in both models). Notably, clients on cliff schedules tend to pay 10–15 bps more at both lower ($250–500K) and higher ($2M and $10M) levels, with minimal differences at the $1M and $5M levels.
In other words, despite the structural risks of cliff schedules, their presence may indicate a more concentrated and consistent set of clientele, whereas advisors with graduated fee schedules may be positioning their prices to attract higher-net-worth clients beyond their typical client profile.
The Growing Trend Toward Multiple Charging Methods
In higher-revenue firms, high-asset clients often pay both AUM fees and additional service-based fees. In fact, nearly three in four advisors use at least two pricing methods, combining AUM, commissions, hourly fees, or other service-based charges.
Nerd Note:
While the percentage of advisors using one versus multiple charging methods remains relatively stable across Kitces Research studies that have tracked this over the years, advisors have gradually simplified their pricing structures, with a greater share charging in just two or three ways.
This shift may be due to the administrative and compliance burden of managing multiple charging methods or the psychological impact on clients when faced with multiple fees all at once.
There are two primary ways that multiple fee methods are used by advisory firms.
The first – and perhaps most traditional – approach is to accommodate clients who may not yet have the assets to meet an advisor's minimum fees. For example, high-income younger professionals may not have accumulated enough wealth to support a full AUM-based fee structure. In these cases, unbundled fees function as a temporary 'holdover' until clients can grow their assets, at which point advisors typically waive separate fees in favor of AUM-based pricing.
The second approach, however, is not about serving lower-asset clients. Instead, it reflects higher fee confidence – advisors charging more for their work without necessarily reducing AUM fees when adding service-based charges.
Kitces Research on Advisor Productivity indicates that this is a common trend:
[A]n advisor charging a $3,000 planning fee to a $1M client might be expected to reduce their AUM fee to 70 basis points, equating to $10,000 in total fees and aligning with the median 1% AUM fee from an AUM-only advisor working with a $1M client. In practice, however, advisors charging separate planning fees tend to charge similar AUM fees without adjustment (e.g., if the bundled firm charges 1% on $1M for a $10,000 fee, the unbundled firm charges the same $10,000 on a $1M client and their $3,000 planning fee, for a total of $13,000 in fees).
In other words, unbundling fees isn't always about reducing client fee sensitivity or reaching lower-asset (or lower-income) clients. Instead, the data suggests that some advisors use unbundling to justify higher total compensation – whether due to greater skill, fuller services, or simply higher overall fee confidence.
When structuring fees, advisors balance their clients' ability to pay the fee on an ongoing basis with the value of their advice, operational needs, and overall fee confidence.
While advisory firms may want the flexibility to charge for their advice in multiple ways, in practice, most prefer to keep things simple. 29% of firms do not require clients to pay both investment and management fees. Furthermore, 54% of firms waive fees to some degree – whether based on asset levels, firm policies, or on a case-by-case basis. This may align with firms that charge separate fees in order to ensure clients meet a 'minimum viable payment', then cease to do so once a client's assets have sufficiently grown.
Notably, only 17% of firms actually charge for both planning and investment management fees, signaling that fee flexibility is not just an operational necessity but a deliberate strategy for many advisory firms. These firms may be more likely to have higher fee confidence to charge separately for their services (resulting in a higher total payment from clients, as discussed earlier) and clients who see the value in paying more for their advice.
Expense Ratios: A Brief Overview Of Portfolio Costs
But of course, a client's total expenses for financial advice go beyond just advisory fees. Clients also incur expense ratios on their underlying investments, as well as platform fees associated with their investment provider. These additional costs are especially relevant as investment fund fees continue to decline.
According to Morningstar's 2023 Annual US Fee Fund Study, "the average expense ratio across U.S. open-end mutual funds was 0.36% in 2023, a 3.4% decline from 2022". The same study also noted that the cheapest funds have lowered prices by nearly 50%, with both investors and advisors flocking to the cheapest option of their investment fund.
This industry-wide fee compression represents a win-win for both advisors and clients as investment fund providers continue their 'race to the bottom' in terms of fund prices. Lower fund costs help clients retain more of their investment returns while also allowing advisors to provide cost-efficient portfolio management.
As shown in the graphic below, this trend is also evident in the declining asset-weighted average fees among major asset managers. While Morningstar remains skeptical about the sustainability of continued fee compression, the current environment represents reduced costs for both clients and advisors.
Investment Vehicle Composition: Rise Of Cash, Mutual Funds, And Cryptocurrency
When it comes to portfolio composition, ETFs remain the dominant investment vehicle, according to FPA's 2024 Trends in Investing, with 89% of advisory firms using them. However, some notable shifts occurred between 2023 and 2024:
- Cash and cash equivalents have risen by nearly 5% (perhaps as firms are finding more ways to manage cash and charge for their services), with 81% of firms using them.
- (Non-wrap) mutual fund usage also rose by almost 5%, with 68% of firms recommending them.
- Private equity funds declined by 6%, now used by only 14% of firms.
- Other alternative investments dropped by 4.3%, bringing their usage to just under 13%.
- Cryptocurrency investment nearly doubled, rising from 2.6% to 4.8%.
In addition to changes in investment vehicle composition, FPA's study noted that passive investment management strategies dropped by nearly 15% in the last two years, with an increasing number of advisory firms (75%) opting for both active and passive investment management styles. And with aggregate portfolio costs remaining low, the additional expense of more proactive portfolio management remains low enough to incentivize advisors into action (so long as they can manage the potential tax impact for clients).
Bringing It All Together: Expense Ratios And All-In Costs
Expense ratios – the fees charged to investors – are a recurring cost in any investment portfolio. Regardless of whether an investor has hired a financial advisor, they will likely pay some form of expense ratio as part of their investment strategy.
However, for clients working with an advisor, the type of firm managing their portfolio can significantly impact the total cost. As the graphic below demonstrates, RIAs generally tend to have lower expense ratios than other advisory channels – especially broker/dealers.
As the Kitces Research data on Advisor Productivity notes, "this suggests that advisors shifting to the RIA model are, in the aggregate, finding ways to eliminate cost layers that otherwise appear to be uniquely associated with broker/dealers". The primary factor behind this difference is compliance oversight. Independent Broker/Dealer (IB/D) and hybrid firms must manage additional regulatory requirements from both FINRA and the SEC, whereas RIAs typically only report to the SEC. This reduced regulatory burden allows RIAs to operate with fewer cost layers, which in turn enables RIA-affiliated advisors to pass on lower all-in-fees to their clients.
While overall portfolio management costs continue to decline, if compliance costs continue to increase, then firms will need to decide whether to pass these increasing prices onward to clients or absorb them elsewhere in their business operations.
The Future Of Financial Planning Fees
As the financial planning industry trends toward more comprehensive, customized planning, fees are also evolving to reflect this shift. While the way fees are charged might not always change, how those fees are considered, valued, and discussed continues to adapt. Flexibility and optionality have become core business metrics for advisory firms, though AUM remains the dominant pricing model.
A greater range of fee structures could pave the road for serving less 'traditional' clients – such as those who are younger, in debt, or have lower assets. Notably, younger advisory firms tend to offer alternative fee structures and attract younger, less asset-centric clients. As these firms mature and their clients accumulate wealth, time will tell what pricing models advisors will want to adopt as they accumulate experience, and which structures clients will prefer as they accumulate assets. Fee-only, hourly, and retainer fees are still small parts of how the financial advice industry cumulatively charges for their advice – but as suggested by Inside Information's "Fees In Motion" report, the presence of these alternative fee structures is growing.
Even though some firms use methods to serve less traditional clients, the question remains for the financial advice industry as a whole as to how to serve such 'untraditional' clients profitability. The reality remains that high-net-worth households 'upstream' are still willing to pay – and often pay more – for financial advice. And as long as this demand persists, advisory firms will remain incentivized to focus on servicing these clients.
Ultimately, the growing flexibility of fee structures supports the emergence of Financial Advice 3.0 – a new era where advisors are moving beyond 'the plan' toward a more holistic and comprehensive approach to financial advice. As financial planning continues to expand beyond just investment management, AUM fees increasingly represent more than just portfolio oversight, including broader services that address the client's wellbeing, long-term financial goals, and overall life satisfaction.
Which, in turn, offers an opportunity for advisors to review how they communicate the value of their advice – and contextualize their fees. In addition to reviewing how they articulate the value of financial advice, firms may also need to review the services that are included in their fees. While bundling services under AUM fees may simplify billing, overloading too many services into a single fee could ultimately jeopardize profitability.
To mitigate this risk, firms may benefit from internally breaking down their AUM fees, identifying the portion that covers investment management and how much funds other advisory services. If the perceived value of these services adds up to more than 100% of the fee charged, that might indicate a need for fee adjustments or other revenue sources beyond AUM.
At the end of the day, advisory fee trends reflect each individual advisory firm's vision of how to best service their clients, how to charge for that service, and the economic realities of what clients need and are willing to pay for. While the industry continues to evolve, how advisors charge for their services will always be a reflection of both business strategy and economic reality. And as financial planning becomes increasingly comprehensive, firms have the opportunity to refine not just their pricing, but also how they define – and deliver – value!
