How Financial Advisers Get Paid: What the Readers Think

Those are two of the many comments—the many divergent comments—I received in the wake of my November column about financial fees. Specifically, I looked at “assets under management,” which is how many advisers are paid. Using this method, advisers assess their fee as a share—typically 1% a year—of the money they’re managing for a client.

My original point: Many retirees don’t understand how this fee model actually works and, as such, could be paying too much for the help they’re receiving.

That thinking, not surprisingly, didn’t sit well with advisers, a number of whom told me I was naïve, at best, about the workings of their business. (Said one: “Qualified financial advisers do more than sit on a street corner, twiddle their thumbs and collect fees.”) The “AUM model,” many said, is simple, time-tested, and benefits clients and advisers alike.

At the same time, though, I heard from investors who shared my concerns. They said they had walked away from, or decided against working with, such advisers precisely because their fees, according to these readers, were excessive.

So, what follows is a closer look at assets under management, based on comments we received from both sides of the fence. I’ll close with some additional points of my own. Most important, my thanks to all who took the time to write.

• You get what you pay for. Almost every adviser I heard from said simply: Fees based on assets are more than fair, given the considerable experience and skills that many advisers bring to the table. Not to mention the sheer amount of work involved.

“We essentially act as the family’s chief financial officer,” wrote Jeff Helms, a chartered financial analyst in Florida. “We serve as the single point of contact for all their financial needs.”

Equally important, most clients prefer this approach to billing, advisers told me. “The 1% fee avoids an hourly bill any time [a client] needs to have a conversation,” said LeGrand Redfield, president of Asset Management Group Inc. in Stamford, Conn. “It also allows for constant monitoring and advice on cash management, risk management, investment management, tax planning and estate planning.”

Fees? What Fees?

Among surveyed investors:

don’t know how their financial adviser is compensated

don’t know the amount of fees they pay on all their accounts.

don’t know how their financial adviser is compensated

don’t know the amount of fees they pay on all their accounts.

• More assets? More work. In my original column, I made the point that an adviser whose fees are based on assets managed will do much the same work for a client with $1 million and one with $2 million, but will charge the latter twice as much. Many advisers, though, argued: That isn’t how it works. Clients with larger holdings invariably involve more time and effort—and, as such, are charged more.

“Larger clients tend to be more sophisticated and normally require much more attention from our office,” one adviser said. “Their asset allocation is more extensive, and this generates more questions, explanations and correspondence.”

• What really counts. Several advisers told me my focus on fees was misplaced to start with. Clients, they maintained, are less concerned with how they’re billed than they are with the bottom line—whether they’re meeting their financial aims.

“How much I get paid rarely is a topic for anyone, other than perhaps new accounts,” said Michael Weinstat, an independent investment adviser in Jericho, N.Y. “I have found that if someone is pleased with me, then they are happy to pay the fee, especially if they are a long-term client and I have accomplished our goals.”

• Sliding scales. Advisers also told me I failed to note in my original column that fees aren’t necessarily fixed at 1%. Rather, many advisers use a sliding scale; fees might be slightly larger than 1% for smaller accounts, but begin to drop as the size of a client’s portfolio increases.

• On the other hand…A number of readers echoed the concerns I discussed in my original column: At some point, fees tied to assets managed simply become too large for the amount of work being done.

“I left my fiduciary for precisely this reason,” wrote an investor in Minnesota. “I had, at the time, $1.7 million ‘under management’ with a 0.85% annual fee. What’s very important is the compounding effect of those fees over 20 or more years. Losing 0.85% in returns year after year adds up to a lot more than the nominal fee.”

Similarly, an investor in New Jersey asked me to highlight the fact that, appearances aside, the fee your adviser collects isn’t the only fee most investors are paying. “Advisers should disclose the embedded fees inside the various products they use,” such as mutual funds, this reader wrote. “The total fees charged the client are the AUM fees plus the product fees.”

For my part, I still see a fundamental disconnect: An AUM fee is tied more to the size of a client’s holdings and less to the actual work being done. Yes, many advisers work diligently for their clients, as do many lawyers, accountants, doctors and other professionals. But financial advisers are the only ones who ask for the size of your wallet before setting a fee.

And yes, clients with large portfolios might well require more work—and, thus, pay bigger fees. But I would wager that many or most advisers have well-heeled clients who require little, if any, hand-holding. If you happen to be one of those individuals, why are you paying the same fees as high-maintenance clients?  

And if clients are interested primarily in the results that their advisers produce—and pay scant attention to their advisers’ fees—well, shame on those clients. A good financial adviser would tell them that, over time, steep fees, much like high inflation, can erode the value of one’s assets.

Finally, I’m gratified that my original column generated much discussion. Of course, that’s exactly what every client should have with their adviser: a detailed discussion about the fees they’re paying and why. Which would make for a good New Year’s resolution.

Mr. Ruffenach is a former reporter and editor for The Wall Street Journal. Ask Encore examines financial issues for those thinking about, planning and living their retirement. Send questions and comments to askencore@wsj.com.