Most retirees have a good handle on their regular expenses. They can tell you down to the penny what they spend on travel or health care.
Yet even the savviest retirees struggle to know exactly what they pay their financial adviser each year.
This isn't unusual, even for high-net-worth investors, and is a pattern I frequently observe in my work as a certified financial planner.
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Advisory fees are often quoted as a percentage of assets and rarely presented as a bold, easy-to-find dollar amount.
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For context, the industry-average fee on a $3 million account is 0.88% and works out to $26,400 per year. Over a decade, that's a quarter of a million dollars and often a surprise for many retirees.
AUM vs flat fee: What retirees should know
About 92% of advisers use the traditional assets under management (AUM) model. This includes both:
- Fee-based advisers (AUM plus possible commissions for insurance, annuities or products)
- Fee-only advisers (AUM, but no commissions on product sales)
If you're working with an adviser or considering one, this is likely the model you'll encounter. The AUM fee model means you pay a percentage of your portfolio's value each year.
Some firms use blended rate tables (similar to tax brackets), while others use a flat percentage, but the core concept is the same: Your fee is based on a percentage of assets.
You can estimate your annual fee with some simple math. Multiply your adviser's fee percentage by your current portfolio value (e.g. $2.5 million times 0.90% equals $22,500.)
While the AUM model is the industry standard, retirees should also be aware of a different approach that is growing in popularity: the flat-fee model.
A flat-fee adviser charges a set, transparent dollar amount for services, regardless of portfolio size. Some flat-fee firms also offer ongoing, one-time or hourly engagements to match different client needs.
Flat-fee advisers can and often do serve in a fiduciary capacity, offering a scope of services similar to their AUM counterparts.
This can include retirement income strategies, tax and estate planning, Social Security and Medicare optimization, and investment management.
Why reviewing fees matters in retirement
The AUM model is beginning to come under more scrutiny from investors.
When a financial adviser takes a percentage of investments, regardless of whether they are actively managing new contributions or maintaining a conservative allocation, this could result in a disproportionate cost for retirees, which may not be worth the expense.
Dr. Jim Dahle, founder of the White Coat Investor blog for physicians, sums this up quite bluntly: "If you were paying 1% of a $500,000 portfolio ($5,000 per year), that's probably a fair price for good financial advice. But when the portfolio grows to $5 million ($50,000 per year)? I'm sorry, you're being ripped off."
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It's not just about what you pay; it's about what you keep invested. Even small differences in fees compound over time.
For example, if you saved $5,000 in fees each year and kept it invested for 15 years at a 5% annual return, you'd end up with nearly $108,000 more for your retirement or your heirs.
Keeping several thousand dollars saved in fees invested over time can meaningfully support both your portfolio's sustainability for withdrawals and your legacy plans.
Flat-fee models offer predictable, transparent pricing that retirees can budget for and help reduce anxiety about hidden costs.
Flat-fee planning: Trade-offs and considerations
Availability. As fewer advisers offer this model, you may not have a flat-fee adviser in your area and may need to be comfortable engaging with a professional virtually.
This can be a non-starter for some retirees. Organizations like the National Association of Personal Financial Advisors (the standard bearer for fee-only, fiduciary financial advisers) provide a find-an-adviser tool that allows you to filter by location and fee model.
Scope of services. While many flat-fee firms offer a similar range and expertise in investment management and financial planning services, it is important to confirm that they offer the scope of services you need for your situation.
Cost differences. A flat fee doesn't always mean more cost-effective. While flat fees are transparent, they can differ significantly from firm to firm.
For example, if a flat-fee adviser charges $10,000 annually for comprehensive wealth management on a $750,000 portfolio, that would be more than a 1% fee on the same portfolio ($7,500 versus $10,000, or a 1.33% AUM equivalent).
Be sure to run the simple math when comparing to an equivalent AUM fee.
Making the right choice: Key questions and actions
Whether you are currently working with an adviser or exploring flat-fee alternatives, it's essential to evaluate both what you pay and what you receive.
Use these questions to assess your existing arrangement or to compare different advisory models:
- Ask for a clear, annual dollar amount. What will I pay in actual dollars this year? Does this fee increase as my portfolio grows, or is it truly flat?
- Clarify what's included. Does my fee cover only investment management, or does it also include comprehensive financial, tax and estate planning?
- Compare models. Would a flat fee or a percentage-based fee be more cost-effective for my needs now and in the future? Am I receiving the same level of service with each option?
- Understand service delivery. If flat-fee advisers are not available locally, am I comfortable working with an adviser virtually?
Taking the time to ask these questions can help ensure you are not overpaying for advice and that your fee structure truly supports your long-term retirement goals.
As more options become available, choosing the right approach allows you to keep more of your wealth working for you.
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