When working with a financial advisor, understanding how they charge for their services is crucial to ensuring your best interests are aligned. The most client-focused fee models for portfolio management is based on Assets Under Management (AUM). Let’s explore what AUM means and why it’s the best fee structure to foster a trusted relationship with your advisor.
A.U,M, or Assets Under Management, refers to the total market value of the investments that an advisor manages on your behalf. Under this model, the advisor’s fee is typically a percentage of your portfolio’s value. This structure creates a powerful alignment of incentives: as your portfolio grows, the advisor earns more. If your portfolio loses value, their income decreases.
Why Is the A.U.M Model Client-Aligned?
The AUM fee model directly ties your advisor’s success to your own. This alignment ensures that your advisor is motivated to grow your wealth and manage risk effectively. Unlike other fee structures, AUM provides ongoing management and incentivizes long-term strategies for portfolio growth.
Here’s how it compares to other models:
Flat Fee Structure
In a flat fee structure, the advisor charges the same amount regardless of your portfolio’s performance. This means that even if your portfolio value decreases, you’re still paying the same amount. Additionally, if you make large distributions—like withdrawing money for major expenses—you’ll still pay the same fee even though the advisor is managing less money.
Commission-Based Structure
Commission-based fees are often the least aligned with your best interests. In this model, advisors earn money by selling you investment products or funds. This can result in a transactional relationship where the advisor’s focus is on selling rather than managing your portfolio. You may not hear from them again until it’s time for another sale, leaving little room for ongoing service or personalized advice.
Fee-Based Advisors
Fee-based advisors combine A.U.M fees with commission sales, which can lead to potential “double-dipping.” They earn both from managing your assets and from selling commissioned products. This can create conflicts of interest, as the advisor may prioritize products that earn them a higher commission rather than what’s best for your portfolio.
Eliminating Conflicts of Interest
The key to building a trusted relationship with your financial advisor is minimizing conflicts of interest. The best way to achieve this is by working with an advisor who is:
- Fee-Only: They earn money solely through A,U.M fees and do not receive commissions from selling products.
- Qualifications: Look for designations like Chartered Financial Analyst (CFA) or Certified Financial Planner (CFP®), which signal a high level of expertise and ethical standards.
- Fiduciary: A fiduciary is legally obligated to act in your best interest. However, be cautious—many commission-based and fee-based advisors use the term “fiduciary” loosely. Verify their actual practices to ensure they prioritize your needs.
The AUM Advantage
When you choose an advisor who operates on a fee-only AUM model, you benefit from a structure designed to grow your wealth. It fosters a collaborative relationship where your success directly impacts the advisor’s success, ensuring they are motivated to provide ongoing service, tailored advice, and proactive portfolio management.
Cross-Border Expertise
If you’re planning on crossing the 49th parallel, working with the right advisor is essential. At 49th Parallel Wealth Management, we specialize in cross-border retirement planning and are committed to aligning our interests with yours. Let us help you grow and protect your wealth.
Reach out today to learn more about how we can guide you on your financial journey. From the Desert to the Tundra, we are your cross-border retirement experts!
