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There are several ways a financial advisor can charge for investment services and advice. How your advisor is compensated has a direct impact on the advice you receive and the conflicts of interests inherent with their method of compensation.
Before we dive in, let's define the term “conflict of interest.” Investopedia describes a conflict of interest as "a situation in which an entity or individual becomes unreliable because of a clash between personal interests and professional duties or responsibilities."
With that definition in mind, let's walk through the three main ways financial advisors get paid — and the conflicts each one potentially creates.
A commissioned advisor earns income by selling you something — typically insurance products, annuities, or mutual funds. The company whose product they sell pays them a commission. The size of that commission depends on what you buy.
You'll sometimes hear this called "fee-based" advice — a term that sounds reassuringly neutral but is largely meaningless. Fee-based advisors can earn both direct client fees and sales commissions, leaving you with no clear picture of where their financial interests actually lie.
The conflict is obvious: no sale means no income. An advisor working on commission has a powerful financial incentive to sell you something — and may construct an elaborate financial plan designed primarily to justify the products they want to sell you.
To be fair, commissions aren't inherently bad. Sometimes an annuity or insurance policy is genuinely the right solution. But when someone earns their living by selling a product, and that person tells you their product is the best possible option for your situation, you have no way of knowing whether that recommendation is driven by your interests or theirs.
Think of it this way. You wouldn't walk into a BMW dealership and expect an unbiased answer to the question: "Should I buy a BMW, an Audi, or maybe just keep my current car?"
One final note on commissions: they create little incentive for ongoing support. Once the product is sold, the advisor has been paid. If you need continuing guidance, you may need to pay an ongoing fee — which brings us to the two most common models for doing that.
The AUM model is the dominant fee structure in wealth management today. Instead of earning commissions, the advisor charges you a percentage of the assets they manage — typically starting around 1% annually and going lower as your assets grow (called “breakpoints”). The fee is typically billed directly from your investment accounts.
On the surface, this sounds well-aligned. The advisor earns more when your portfolio grows, so their interests should be aligned with yours, right?
The core problem: advisors don't generate market returns - financial markets do. The real value of a financial advisor lies in planning — asset location, tax strategy, retirement income, estate coordination, Social Security optimization, risk management — not in picking stocks. Research consistently shows that the vast majority of professional fund managers fail to beat the broad market over time. The odds that your advisor has cracked the code are essentially zero.
More importantly, the AUM model introduces conflicts of interest that the CFP® Board has flagged as material. Here's why: every major financial planning question an advisor answers could mean a smaller portfolio — and a smaller paycheck for the advisor and their firm.
Think about questions like these:
If your advisor answers "yes" to any of these, it may reduce the assets they manage — and reduce their annual fee. That doesn't mean every AUM advisor will give you conflicted advice (and most AUM advisors are honest fiduciaries). But it means the conflict can be there, simply because the AUM model incentivises advisors to "gather" more assets to advise on— and charge fees on.
Beyond the potential for conflicts of interest, the AUM model has some structural problems:
The fee grows with your wealth. A $2,000,000 portfolio at 1% costs $20,000 per year. If your portfolio grows each year, your fee also grows — compounding year after year, whether or not the complexity of your financial situation has changed at all. If you receive a significant inheritance or windfall and invest the money, your fee goes up. No other professional service works this way.
The cost doesn't generally match the work. Managing a $5 million portfolio doesn't require two times the time or expertise of managing a $2 million portfolio. But it typically costs twice as much under the AUM model. Portfolio size is generally a poor proxy for the complexity of your situation or the value of the advice you receive.
Let's look at what this means over time.
Consider an investor with a $2,000,000 portfolio. A 1% AUM fee starts at $20,000 per year but grows with your portfolio. Fast forward 10 years, and with significant contributions to your portfolio and a bull market in the stock market, your portfolio is now worth $5,000,000. Your AUM fee has decreased to 0.84% (because of “breakpoints”), but the dollar amount of your AUM fee is now $42,000 per year.
The flat-fee model is a newer approach that challenges the status quo of asset-based pricing.
Instead of charging a percentage of your portfolio, a flat-fee advisor charges a fixed annual dollar amount for a defined scope of services (typically ongoing investment management and financial planning). The fee is based on what they do for you — not how large your portfolio is or what products they can sell you.
At Arcadia Private Wealth, we charge a flat annual fee of $18,000. That fee covers a complete household — retirement planning, ongoing investment management, tax planning, Social Security optimization, estate planning coordination, and more — regardless of whether your portfolio is $10 million or $3 million.
The conflict of interest picture is dramatically different. Because a flat-fee advisor’s fee doesn't change based on the size of your portfolio, they have less financial incentive to steer you away from paying off your mortgage, making a large charitable donation or family gift, taking on less risk, or spending your money freely in retirement. Every recommendation should be based on what's right for your situation.
One honest caveat: the flat-fee model isn't always cheaper in the early years. If you have a smaller portfolio, a percentage-based fee may be lower in dollar terms than a flat fee. At Arcadia, our minimum portfolio size is $1.5 million — the level at which we believe our flat fee represents fair value for both parties. At higher portfolio amounts ($3 million and up), our flat fee generally represents a significant cost savings compared to the typical AUM model.
No fee model is perfect. But they are not all equal when it comes to protecting your interests and your wealth.
Commissioned advisors have an inherent conflict between selling and advising. The AUM model introduces its own set of potential conflicts — and compounds costs in ways most clients never see coming. The flat-fee model eliminates many conflicts and keeps costs transparent and predictable over time, but may not be the best fit for smaller portfolios.
At Arcadia, we built our practice around the flat-fee, fiduciary model because we believe that's the structure most likely to produce genuinely unbiased advice. Not advice that's shaped by what grows our revenue — advice that's shaped by what's actually right for you.
Disclosure: This article is for informational purposes only and does not constitute personalized tax, legal, or investment advice. Please consult a qualified financial advisor and CPA for guidance specific to your situation. Arcadia Private Wealth LLC is a Registered Investment Adviser in the state of California. Advisory services are only offered to clients or prospective clients where we are properly registered or exempt from registration.
Grant Webster, CFP®, TPCP®
Founder, Wealth Advisor