There are three primary ways in which consumers pay for financial planning advice – asset-based fees, flat fees (which include one-time payments, ongoing retainer arrangements, and subscriptions), and hourly-fees. Determining which among these best serves consumer interests is a hotly debated, often polarizing topic within the financial planning community. Most often, planners in the fee-only and hourly billing camp strive to sieze the moral high ground by painting the asset-based fee model as hopelessly conflicted and self-serving. The reality is far more nuanced.
The purpose of this article is to raise reader awareness of advisor incentives and conflicts of interest and structural differences in each of the three models. At the conclusion of this piece, I offer my opinion on the compensation model that I believe is least suited for financial planning. I will also share my assessment of the current state of the financial planning industry and offer my predictions for its future.
Navigating the Financial Services Landscape – Who is and who is not a “Financial Planner”
Before we dive into the compensation model discussion it is important to understand how financial planning fits into the broader financial services landscape. Unfortunately for consumers, this landscape consists of a byzantine and unbalanced regulatory framework awash in a sea of jargon.
To begin, there are three main regulatory authorities that oversee the conduct of financial advisors (a generic term applied to client-facing reps under all regulatory regimes). Insurance agents are overseen by the National Association of Insurance Commissioners (NAIC). Stockbrokers (also called “registered reps”) are regulated by the Financial Industry Regulatory Authority (FINRA). Financial advisors in both of these regulatory frameworks are primarily engaged in the sale of products in return for commissions. While these advisors may give investment and insurance guidance, because their advice and compensation is linked to the sale of products it is not considered financial planning advice.
Financial advisors who get paid purely for advice are regulated directly by the Securities and Exchange Commission under the Investment Advisers Act of 1940. The Act applies to all financial advisors whose guidance includes investment advice pertaining to securities. The act requires all such investment advisers to be registered with the SEC and held to a strict fiduciary standard of conduct that, among other things, requires upfront written disclosure of all conflicts of interest and complete fee transparency.
Although the 1940 Act specifically applies to “Investment Advisers,” the SEC long ago clarified that its regulatory oversight extends financial advisors who present themselves as financial planners so long as the planning advice they provide includes guidance pertaining to securities. [SEE: SEC Interpretive Release 1092 – The Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services.] Thus, while there are many portfolio managers who operate exclusively as investment advisers, financial planners are a subset of the SEC’s universe of registered investment advisers.
If a consumer is unsure whether a financial advisor is a financial planner or not, the easiest way to check is by searching for the advisors name on the SEC Investment Advisor Public Disclosure website at https://adviserinfo.sec.gov/ . This site will indicate whether the person is registered with the SEC and, if so, provides detailed information about the adviser’s background, experience, and disciplinary history. Additionally, all financial planners are required to provide a copy of a plain English disclosure document called SEC Form ADV Parts 2A and 2B at or before the client engagement. Another document called the Customer Relationship Summary (Form CRS) discloses all potential conflicts of interest in working with the planner. It is required to be provided concurrent with the ADV.
While the process of identifying a financial planner seems easy enough, the existing regulatory environment in the U.S. permits financial advisors to hold multiple regulatory licenses. It is not uncommon for an advisor to be licensed as a registered rep with FINRA, hold and insurance producer’s license, and also be registered with the SEC as an investment adviser representative (IAR). Adding to this confusion is the fact that the CFP Board of Standards – the private organization that owns and promotes the Certified Financial Planner (CFP) designation – permits its members to use the mark even if they only sell insurance products. Because insurance products are not securities, these “Certified Financial Planners” fall outside the regulatory reach of the SEC. When in doubt, check the SEC IAPD website. The ADVs will reveal how many regulatory hats the advisor wears. If there is no ADV, then the advisor is not regulated by the SEC as a financial planner and is not held to held to the SEC’s fiduciary standard of conduct.
The Business of Financial Planning Advice
Although the Investment Advisers Act of 1940 does not specify the manner in which registered investment advisory firms (RIAs) and their investment advisor representatives (IARs) (including financial planners) should be paid, since the Act’s inception, the most common form of compensation has been a percentage of assets under management (AUM). This makes sense because for most of the ensuing decades since the Act’s inception, investment advisers’ sole responsibility was to serve as portfolio managers. Mutual fund companies, bank trust departments, and RIAs all were paid to grow the assets under management.
Although financial planning, ironically has its roots in the insurance industry in the 1970s, the emergence of holistic financial planning – guidance that encompasses investment management along with tax planning, estate planning, insurance risk management, debt management, and more – has only blossomed since the 1990s. Since portfolio management is no longer the sole focus of the engagement, other forms of compensation have evolved beyond the staid percentage of AUM. As referenced at the beginning of this article, these include hourly billing and the various forms of flat-fee billing.
So which model is best for consumers? The argument put forth by both the hourly and flat-fee planners is that fatal inherent conflicts of interest spell doom for the asset-based fee model’s future as holistic planning continues to replace the investment-centric wealth management construct of the past. Evaluating the strength of this argument requires considering the planner’s incentives in all three models and comparing structural differences.
Incentives and Conflicts of Interest in Fee-Based Compensation Models
To borrow a line from the best-selling book, Freakonomics, “Incentives are the cornerstone of modern life. And understanding them – or often ferreting them out – is the key to solving just about any riddle.” Critics of the AUM-based correctly point out that planners have an incentive to gather as much of the client ‘s assets as possible and to discourage clients from allocating AUM to other objectives, such as paying down debt or investing in real estate. This conflict is obvious and should be disclosed in every AUM-based planner’s ADV and CRS. Planners using AUM billing should be mindful of their fiduciary obligation to always put the client’s interest above their own asset gathering interest.
However, the largest conflict of interest in the AUM detractors’ view is that it unfairly charges a higher dollar amount to wealthier clients without necessarily doing more work. In fact, many detractors specifically direct their invective toward 1%-1.5% level AUM fees. There is increasing acknowledgement across the financial planning community that the level AUM model is structurally flawed. While this level fee range was the unofficial standard twenty years ago, according to a recent survey by researchers at Kitces.com, only around 10% of AUM-based planners still apply level fees with 90% having shifted to some form of tiered/graduated AUM billing. On this score, it should be noted that a tiered pricing model that declines to 0% above a certain asset level is effectively a flat-fee model.
While the inherent conflicts of interest in asset-based billing should be acknowledged and disclosed, are flat-fee and hourly fee-billing conflict free? To usurp a quote from the American Bar Association’s guide for new lawyers, “There is a conflict of interest in every advisor-client relationship – It’s called attorney fees.” In fact, to ferret out the incentives in each of these models, it is instructive to turn to the legal and accounting professions since they have both employed flat-fee and hourly billing model for decades longer than the financial planning industry has.
In the legal and accounting professions, flat-fees are called retainers, and there is abundant literature from both fields about the inherent conflicts of interest in retainer fees insofar as the tax or legal advisor has an incentive to do as little work as possible to retain the ongoing fee and has an incentive to prolong the arrangement for as long as possible. While the same could be said about the AUM billing model, there is a general perception that AUM-based planners have an incentive to stay engaged in ongoing portfolio management.
With respect to hourly billing, it ironic that this compensation model is sometimes lionized as being “conflict-free” in the financial planning world when, in the legal and tax professions, it is widely vilified as hopelessly conflicted. Under this compensation method the planner has a financial incentive to bill as much as the client will tolerate, and there is no way to verify if the hours billed were actually worked. There are scores of articles and journal papers from both professions on “The Tyranny of the Billable Hour.” This topic was addressed in a Wall Street Journal articles in December (2025) titled – Say Goodbye to the Billable Hour, Thanks to AI.
Structural Differences
In comparing the three financial planning billing models, it is also important to consider structural differences. For instance, AUM-based investment advisers whose services include comprehensive financial planning offer clients a specific tax advantage that does not exist in the other two models. Specifically, the IRS permits investment advisory fees to be paid proportionately from a client’s qualified pre-tax retirement accounts. It also permits business owners to deduct advisory fees as an expense of the business. This advantage was even greater prior to 2018 when the Tax Cuts and Jobs Act eliminated the deduction for tax return preparation and investment advisory fees. Financial planning fees have never been tax deductible and paying them from an IRA would be considered a taxable distribution subject to an additional 10% penalty for clients under age 59 ½.
Another structural difference that is often overlooked in the model debate is that AUM-based advisers typically include discretionary portfolio management in their service model, whereas most flat-fee and hourly managers do not directly manage the portfolios. While some flat-fee and hourly planners may have a limited power of attorney for trading others leave it to the client to implement the planner’s recommendations. In contrast the AUM-based financial planner’s portfolio management services often include cash management services, move-money requests, and other related account management services.
This higher level of portfolio management engagement may also be perceived by the client as a higher level of accountability. While it is misleading to assert that that AUM-based planners “do better only when our clients do better,” it is a structural advantage of the AUM model that the planner’s fees decline when portfolio values decline. Flat-fee and hourly planners may retort that it is not kosher for AUM-planners to get paid more just because the stock market rising lifts portfolio values. However, as practical matter, consumers seem to appreciate the accountability, and do not object to having the planner participate in their portfolio’s growth as long as they also get paid less when the value declines.
Flat-fee and hourly advisors may also counter that seems disingenuous for AUM advisors to hold themselves out as doing comprehensive financial planning while billing only on portfolio management. However, most consumers justifiably regard the investment management of their life savings as the most important element of their overall financial plan.
One final structural difference which has been entirely overlooked in in the public discourse is that the only way for hourly-planners and flat fee planners to keep pace with the cost of living over time is to either raise their fees or get more clients. In contrast, AUM-based planners may maintain a smaller, more manageable number of clients because their revenue tends to grow organically overtime purely from portfolio appreciation.
Conclusion
The aim of this essay has been to raise awareness of the conflicts of interest in the three financial planning compensation models and to highlight structural nuances that are often ignored in the debate forum. In my opinion, the flat-fee model is the least conflicted of the three models, but there are compelling structural advantages that may also favor a tiered-AUM model. I agree wholeheartedly with the criticism of the level-AUM model. At the same time, I contend that the hourly model is the least transparent and most conflicted of the three financial planning billing models. It is the only model that creates a disincentive for clients to take time to share information with the planner. Since information gathering is arguably the most important and time-consuming step in the financial planning process, in my opinion, hourly billing is just as fatally flawed as the level AUM fee model.
In terms of the current financial planning fee landscape, according to a 2024 research survey produced by financial planning industry thought leader Michael Kitces, 92% of financial advisory firms offer asset-based compensation with 86% reporting it as their primary billing method. Despite persistent predictions of the decline of asset-based compensation over the past 15-20 years, its adoption rate has not faltered. However, as previously noted, there has been a dramatic shift away from the level AUM model toward tiered/graduated AUM billing. Another notable trend that was highlighted in the survey was the adoption of multiple compensation models in addition to AUM. 42% of the firms surveyed reported that they also offer hourly billing while 37% offer flat-fee billing. Consistent with the theme of this essay, I believe all of these trends are healthy. Looking ahead, I believe holistic financial planning will continue to grow and that the tiered AUM and flat fee models will ultimately prevail as the pricing models of choice.
