Debate: AUM vs Flat Fee Which is Better?

16:37Mindy Jensen:And I should clarify, I meant historically, many years ago when I first started investing, oh, why would I have somebody else do this? I can do this myself. And I think there's a lot of people who in our audience had the same thoughts in the past. And I am now moving towards, hey, I do think I need some professional advice. I think that I could have benefited from some professional advice 20 years ago when I was having babies and would have perhaps saved more for my kids' college than I did, which is currently zero. And she's in college right now.

17:09Scott Trench:I think that a CFP is almost like a required designation for somebody that I consider hiring for financial planning services. It depends, right? There's times that maybe I know somebody or really respect them and they don't have that particular designation, but they are licensed. Maybe I'd work with them. but I think that it is a required designation. So I both respect it. And my, my alarm bells go off immediately when someone says they're a CFP and I check, Oh, okay. They're not a fee-based CFP. Okay. Now I can, I can begin the conversation and to the point today, Oh, they're not AUM either. Okay.

17:40Scott Trench:I would be interested to see if people agree with that, perhaps in the comments here on YouTube, if that's something that you feel as well, when you hear the moniker CFP, or if it's just me in there, but I would imagine, you know, it's almost a requirement and it's also a flag. And then the other point I want to make is when it comes to insurance, people think, oh, Scott's against life insurance or permanent life insurance. And I'm like, no, I see there's a use case for it in some cases. I think you can generally argue that there's other ways to achieve the goal of whole life insurance with a better return profile.

18:09Scott Trench:What really kind of bugs me about that model in particular is if I want life insurance, I want to go and I want to buy life insurance. I want to go to the life insurance salesman. right? I don't want to go to somebody who's saying that they're a financial planner and then get sold life insurance. And that's, I think, the real problem I have personally with the commission-based model in a CFP. I don't want that to be a primary incentive structure in there. But if I want insurance, I want to go to the person who says, I'm an insurance salesman. Of course, I will give you that product. Just like I go when I go to a mortgage broker to get a loan or when I talk to a real estate investor about when I get a house.

18:45Scott Trench:The answer is, of course you should get a loan. Here's a big one, right? And of course you should buy a house. Here's a nice one. That's what I'm expecting from the insurance broker. I just find that to be a conflict of interest in the commission incentive type structures.

18:56Ryan Sterling:I agree. And a good CFP should be able to review what the insurance salesperson is coming back with and running it through the plan to see if that actually is the insurance policy that makes the most sense.

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22:15Mindy Jensen:Get more with Northwest Registered Agent at northwestregisteredagent.com slash moneyfree. That's a really great distinction and a really great point. Having somebody to run all of your ideas past can be a really, really powerful double check. They're not biased like you are. so like you are with your own personal finances, not you, Ryan, specifically. But they're not biased like you are so they can look at it with a more objective eye. Hey, remember this was our plan. Meanwhile, you're like, oh yeah, this is the plan but then this happened and this happened and this happened. So I think having an unbiased opinion, looking at your finances and keeping in mind your goal because you're out there living your life, your goal might've changed or tweaked in your mind but it didn't tweak in the financial planner's mind.

23:03Mindy Jensen:So for listeners who are hearing AUM all the time, but they might not really understand it, can you explain how the AUM fee actually works in practice and why this is a good monetization mechanism for the services that you provide?

23:16Ryan Sterling:Yeah. So AUM stands for Assets Under Management. So the fee that we charge is on an annual basis, let's just say our first intro fee. So for under$500 ,000, our fee is 0.9%. So what we do then is every single quarter, we look at the portfolio value that we manage, and we take a quarter of that every quarter from the portfolio. We're very open, we're very transparent about it. When clients get their statement, it's on the very first page of their statement, so they see exactly the fees that they're paying us. But it's on a quarterly basis, we again take a quarter of the 0.9 % every single quarter.

23:56Ryan Sterling:And we do have fee breaks as assets grow over time. Now, I also want to be clear that it's only the amount that we're managing. If a client has a 401k, we're not billing on that. Client has a rental property, we're not billing or charging on the portfolio value of their rental properties. We're not billing on clients who have some kind of fun side trading accounts. We're not billing on that. It's just on what we manage. But we take everything into account as it relates to financial planning and understanding the client's balance sheet.

24:31Mindy Jensen:OK, that's interesting. You said that you actually just knocked off one of my biggest arguments against this is that people don't know what they're paying. And the fact that it's on the first page is, I think, really, really important because there's all of these projections. Oh, you're paying, you know,$11 billion in fees and you don't even know it because it's hidden in this one percent or this point nine percent. But to have it right there front and center, I think, is really important and really helpful. So they know. I mean, I have a friend who was on the show and we walked through the fact that she is using an AUM advisor and she's doing it on purpose.

25:04Mindy Jensen:She knows how much it's going to cost. And she's fine with that because her husband passed away and he was the money guy and she doesn't feel comfortable doing it by herself. And as long as she's aware of what's going on, then it's her business to do as she pleases.

25:20Ryan Sterling:That's right. You know, it's interesting. we have a client of ours who long story short needed a lot of help had a 400 000 portfolio part of that was from inheritance and was interviewing advisors and he was between us and another firm that was a flat fee only and the interesting thing is he came to he came to me and said i'm going with you i like the other advisor they're cfp they're very knowledgeable trustworthy etc but you guys are less expensive i said oh that's interesting you know it was like 400 000 or so. So you can do the math there, you know, charging around 3 ,600 a year. And I asked, Hey, you know, what did the other advisor charge out of curiosity?

25:55Ryan Sterling:And he said, Oh, they were charging 2 ,500. I said, just being fully open and transparent. Like we're actually more expensive than that advisor. Just, just to be clear, if that's, if that's kind of the deciding point, he was no, no, but I'm not paying you. I said, yes, you are. It's coming from the portfolio. He goes, no, no, no. But this guy's making me write actual a check or put my credit card that I have to pay for it up front. And I said, okay, I get that, but they're not going to be charging anything coming from the portfolio. We were going back and forth for like a good 10 minutes until finally he had to convince me that this was better for him because he just feels better because he doesn't feel like the fact that he's not writing a check or putting on his credit card, he feels better about it.

26:35Mindy Jensen:Mindset is huge. And like what I've wrapped my mind around might not have total basis in reality, but that's what I believe. And therefore, that's how I'm going to go. And, you know, if I have to write a check, that's money coming out of my pocket. If you're just taking it off the top of money that isn't in my pocket anyway, it's over here in this bucket for the future. I can see his point.

26:56Scott Trench:You know, we don't know what AUM fee is. We've talked about the different monetization models. I would love to bring you my top three concerns with the AUM model, and we can react to them one by one here. The three primary concerns I got are, one is, especially as portfolios scale, I think this is an extremely expensive way to pay for financial planning. Number two is I believe that while there's no conflict-free or perfect way to compensate anyone, that the flat fee or advice-only model produces less conflicts of interest or fewer conflicts of interest than the AUM-based model. And I think the third one is that the automatic passive deduction of fees from investment portfolios removes transparency and the hard regular reevaluation of service, which is so perfectly that that that fear was so perfectly encapsulated by the example you just gave here of this person who felt, no, I just feel better about paying that way.

27:49Scott Trench:I think that is one of the reasons why it's a much more expensive way to have financial planning. Would it be OK if we went through each each of those one by one? Yeah, absolutely. I put in a quick model here for a scenario and I modified it based on your suggestion here where I said, we're going to use real dollars,$2026. We're going to say, how much does financial planning services cost under two scenarios, flat fee versus AUM, using NerdWallet Wealth Partners fee schedule, which has a graduated fee schedule where if you're going to pay 0.9 % on your first$500 ,000, I think I did actually graduate this.

28:22Scott Trench:You're going to be a little cheaper than our model here is going to show. That'll bump down to 0.8 % once you get into the 500 to a million range, 0.7 % in the million to 2.5 million range, 0.6 % on 2.5 to 5, so on and so forth. We're going to apply a real return to portfolio balances and then add$20 ,000 per year because this is BiggerPockets money and our users are going to save about$20 ,000 per year, probably at minimum. And we're going to say which one is more expensive, flat fee or AUM based. And so again, this is the graph of those projections here where we say a flat fee is going to cost$7 ,500 per year.

28:55Scott Trench:We have this escalating with inflation. So these are all real dollars. The retainer goes up by 2.5 % a year every year, stays constant in$2026. And if we assume that, we're going to pay$225 ,500 over 30 years for financial planning advice in this scenario. And the AUM fees are going to compound, although the slope will change as we get into higher and higher total AUM fees until we get to really big differences depending on the starting balance we have or the total amount of wealth we have. A kind of a table way to summarize this is if we start with a$500 ,000 portfolio, we're going to pay$330 ,000 in fees for the same financial planning services as our$7 ,500 a year flat fee model.

29:41Scott Trench:If we start with a million bucks, we're going to pay$520 ,000, which is nearly double the amount we're going to pay for flat fee. If we start with$2 million, we're going to pay$865 ,000 or about$600 ,000 more in fees for the same financial planning services over a 30-year period. And I also want to caveat this, that I think I was actually very generous to the AUM model here, because it's very unlikely that the$200 ,000 or$500 ,000 or maybe even the million dollar portfolio individual is going to start their relationship with a flat fee advisor at$7 ,500 a year. They'll probably start much lower.

30:15Scott Trench:But what's your reaction to this from an expense standpoint to the user?

30:18Ryan Sterling:So first off, I would say that the vast majority of our clients start in that$200 ,000 range. Our core client is kind of that high-earning millennial who's kind of at the start of their wealth-building journey. So number one, and I totally agree that you're probably being very fair to us because a lot of the alternatives in the flat fee space would start probably in the$2 ,500 to$5 ,000 range. So number one, I would say that, especially for our core clients, that it is less expensive for, it looks like, again, it's the first 30 years. If you were to change the flat fee, I think we're reasonably comparable, probably over a 25, 30-year period, starting in the 200 ,000 range, which again, most of our clients start with.

31:04Ryan Sterling:I would also say that within these kind of quote unquote debates that we have in the industry about AUM and flat fee and hourly fee, et cetera. I would say like one way to diffuse these debates is that I agree that a lot of AUM advisors charge way too much. So when we constructed our fee schedule, you know, we made sure to put certain break points in place so that, you know, clients aren't at$5 million paying over 1 % for AUM fees. So like, I would say that fees are way too high. And quite frankly, I would say that as that chart illuminated, that if you're someone who you know asset allocation, you're very disciplined, you listen to this podcast on a regular basis, you consume all the FI books, all the FI materials, you're technical, you trust yourself, et cetera, you might not need an AUM advisor or you might not need an AUM advisor for over 30 years.

31:59Ryan Sterling:I would be the first one to say that. But I will say what that chart does not taken into account. And this is also part of the reason, and I'm happy to go into this more in terms of why we went AUM, because we tried a number of these other fee structures. And one thing that is not captured in those charts over time is people willing to pay the$7 ,500 every single year, especially early on, and then trusting them with their own devices to manage their portfolio. So let me just take one step back here. So years ago, we had a flat fee option. We had an hourly option. We had the AUM option. My hypothesis was that most people are going to benefit from the flat fee option.

32:46Ryan Sterling:That was my hypothesis. And that's what I went strongest to the hoop with. And the interesting thing when I kind of looked at this two years later is the clients that were having the best outcomes were clients who were being charged the AUM. That was true for clients that started with$100 ,000. That was true of clients who started with$2 million. And the reason being is with the flat fee model, we were doing a financial plan. We were getting everything in place. Everybody felt really good about it. And then things kind of, I don't want to say they got on autopilot, but oftentimes they kind of do.

33:19Ryan Sterling:And in year two, people say, hey, that was great. I'm really happy with this plan that you built, but I don't think I need to pay the$3 ,000 or$5 ,000 for next year because I feel good with everything. And then you check in six months later and you say, how's everything going? Well, an election was coming up and I got really nervous and I sold everything. Or there was a bump in the road, the market was down, 10%, I panicked and I sold. It really kind of opened my eyes to, gosh, this was happening with such frequency that, look, as an advisor, in many respects, I see myself just kind of in all aspects flexible life.

33:53Ryan Sterling:I'm very much kind of a coach in so many different ways. And as a coach, you're invested in your client's outcome. I wanted to see people, of course, have really good outcomes. And it was really discouraging when I would see that with the people who are paying a flat fee, who would then go away and then come back. When I would look at then the clients who are AUM clients, who stuck with us through the ups and downs of the markets, through election cycles, et cetera. And when I would look at their progress, I said, gosh, like the AUM clients are having so much more progress. And I looked at this as we were growing and scaling.

34:28Ryan Sterling:And I said, gosh, like it's going to be really hard to have three fee models. I'm seeing clients, our clients are having the best outcomes on the AUM model. It just felt right to collapse all of them into the AUM model. When we told our clients that we were collapsing everything into to the assets under management model. One thing that was really surprising is a lot of the clients who were, you know, the flat fee or the hourly, that, oh, thank goodness, like this is what we were looking for, you know, the whole time. And I was really surprised by that. Now that said, we did have a number of clients who were operating on their flat fee, who were really, really, really disciplined.

35:07Ryan Sterling:They were good. They followed the plan. Every time we checked in, they were making progress. And you know what? We just kind of severed ties there and wish them the best. And they might be listeners of this show and they're doing really well. So, you know, I think that's where I would say, look, like when we look at the fees over time, I think for a lot of people that like this, it probably is going to be more expensive for them over time through an AUM model. But it's interesting, I was listening to one of your shows this past weekend. It was a really good show with someone who reached financial independence and he had to apologize for using active mutual funds.

35:43Ryan Sterling:And you guys did a really good job saying like, hey, if that worked for you, like that's fine. And I will say that, you know, our current clients, again, as I mentioned before, financial independence is mandatory. We need to guide our clients to financial independence. However, most of our clients are not FI evangelist. They're not diving into this. you know, I think about, I have a friend of mine who is in very good shape. He's like a stone's throw away from getting certified for being, you know, being a personal trainer. He counts his macros, like he is into fitness and he makes fun of me because I have a personal trainer.

36:27Ryan Sterling:And he said, look, like all you need is four to five sessions. You learn all the lifts. Like, why do you still work with this person two years later? And I said, look, like when I pay for it, I show up for it. I know all the lifts to do. I know the exact circuit that he puts me through, but this is why I pay for it is that he gets me to show up when I don't want to. And then number two is he gets me to do just a little bit more. And those gains from marginal improvements make a big difference over time. So that's where I'd say like our client is not the person counting macros. Like they're not the person who maybe could be a fitness coach.

37:06Ryan Sterling:You know, they're the person who's like, hey, I know I need to do something. I know that I'm going to benefit from having a long-term relationship. And this is the model that keeps them showing up year after year.

37:19Scott Trench:This feels like a really good time to promote my new fitness coaching program, which charges a fee based on pounds of muscle.

37:27Ryan Sterling:I would benefit from that fee, by the way. It'd be a lot less expensive for me.

37:31Scott Trench:I would pay by a pound of muscle. If I'm paying an AUM based advisor or a flat fee advisor, then I'm feeling that pain and that cost. And I'm probably inclined to show up either way. And I'd argue I might be even more inclined to show up on the flat fee model. And so I think that the difference between having a financial advisor and having no financial advisor, there's certainly a big difference there is your argument that because the fees are more in your face with a flat fee advisor, that the client is much more likely to then fire the flat fee advisor and stop following the plan than under the AUM model.

38:11Ryan Sterling:That's exactly right. And that's exactly what I saw in practice.

38:13Mindy Jensen:I can totally understand that. I mean, this goes back to my comment earlier, the psychological aspect of writing a check might be so much more overwhelming that because that's coming out of today Mindy's pocket. That's not coming out of future Mindy's pocket. That's future Mindy's problem. I can see your point, Scott, where, you know, oh, if I have to write the check that I'm actually going to do it, I can also see, oh, that's a line item in my budget I can get rid of when I'm making my new budget next year.

38:38Ryan Sterling:And I think it's especially true and important earlier on when that person who's a high earner who has, you know, a hundred thousand that they're starting with and they're in the wealth building stage of their life, that$3 ,500 check that they're writing, that's meaningful. And that's something that they do feel that pain. And I think that's where our AUM structure, especially for those clients in the earlier days, that's what keeps them coming back because, yes, our fees are transparent. Again, it's on the front page of every single monthly statement. So they see it. But because they're not feeling that pain of writing the check, they're showing up for it year after year.

39:19Ryan Sterling:And we're seeing those clients, again, be able to see that the progress from compounding both in terms of working with us and putting it through the plan and making sure that they're held accountable to the annual contributions, et cetera, but then also staying invested through the entire time.

39:35Scott Trench:I've come at this with the, I guess, bias or assumption that many of the people who are going for financial planning services are bringing the$500 ,000,$1 million,$2 million to the table. And those are the clients that the advisors want. You've got 100 grand and you're paying a 0.9 % AUM fee. You're paying$900 for financial planning services. If you can get$3 ,000 or$3 ,500 worth of value, the equivalent there, then in that case, I agree, it makes sense. But that fee compounds over time. And when that point crosses over, is that the time to switch? Is that how one should think about it?

40:09Ryan Sterling:I mean, so first off, so in that example that you showed, so let's just look at the$200 ,000. And I know it's not totally fair with the 7 ,500, but you know, you see that crossover point in whatever it was. I actually, I don't even know that it crossed over in that example, but let's just say that it was, yeah. So in that, that's 30 years and it still hasn't crossed over.

40:28Scott Trench:Okay. Let me ask you the next question. We kind of, we kind of like, so we have my three, my three challenges were it's expensive, it's passive. So you don't feel it and you may not be as rigorous in analyzing whether you're getting that value from your financial advisor on a regular basis. And the third one is what I perceive to be is the potential for conflicts of interest under the AUM model. And so some of the concerns I have there would be, for example, is this advisor who is making money on an AUM basis, are they likely to encourage me to maximize for terminal net worth, basically, instead of really financial independence?

41:02Scott Trench:Because that's going to help them make more money. If the more I stack into my 401k, the more tax advantage it is, the more their AUM swells. And that may not be congruent with my goal personally. Another example is let's say that I have a 6.5 % mortgage. There's a very fair argument that in certain stages of life and certain goal conditions, that's better than continuing to put that money into a investment portfolio in some circumstances. It depends on what you believe in. But will the advisor be likely to give advice that is, no, don't pay off that mortgage. Keep the money with me in that scenario.

41:36Scott Trench:Another one would be, and I'll just list one or two more here. Will this person be very cautionary to me, perhaps more so than is due, to avoid real estate or private business investments, even if I have a hankering for that or reasonable probability to succeed in those areas? And last, will this person maybe be a little bit cautionary or put the brakes on me giving money to the next generation or giving it away charitably as a result of that? We talked about passively managed index funds. It sounds like that's not an issue for you, but that's something I would worry about as well. It's just, you know, I believe, I'm a big, strong believer in low fee, passive managed index funds.

42:10Scott Trench:Can an advisor put my money in those and feel good about it? Or is that something that they're going to be a little bit, hey, I want to kind of do something a little different here to prove my value if people are going to pay me an AUM fee. So those are the conflicts of interest that I see that, again, there's going to be some with flat fee. Potentially, they're going to want to keep your business on a year-to-year basis and roll that. So you can make different arguments about that. But those seem to be less obvious conflicts of interest than the ones that I just presented for the AOM model.

42:37Ryan Sterling:So I've had a number of instances where clients have taken money out of the portfolio to buy a rental property or to buy their primary residence, whatever it may be. And we're actually revenue neutral with it. Or actually, in some instances, we actually, our revenue goes up from that. But again, that's why we very intentionally have those cliffs as opposed to a graduated scale. You know, one of the reasons this is a good business is because we have long-term client relationships. So again, we are more incentivized to keep the client over the long-term than try to make a quick buck in the short-term.

43:10Ryan Sterling:And a lot of this is illuminated in the plan. So for example, you gave a great example with the six and a half percent mortgage rate. I had a client recently that was buying a new apartment and we were modeling out, you know, didn't make sense for them to take a mortgage or didn't make sense for them to pay cash. And when we put it through the financial plan and we presented to it in real time, it was roughly equal because of capital markets assumptions, given where we are with the markets on and so forth. So it was roughly equal in terms of that six and a half percent hurdle rates. And I asked the question, like, what feels better to you?

43:41Ryan Sterling:And he said, it kind of feels better to pay cash right now. That's what he did. And that's fine. And you know what happened after that? The client actually gave us a referral. And part of that is like, when people trust you, when people like working with you, they tend to tell their friends. So I am much more incentivized to keep this client as a client for life, as opposed to trying to convince them to keep an extra$600 ,000 in the portfolio, because we're going to make a little bit more.

44:06Scott Trench:I think that's a very effective argument in there. And I also want to couch that these conflicts of interest in various AUM things that I'm pointing out here are relatively mild compared to like the commission's structure, where if you go to a financial planner, a certified CFP who sells life insurance products, I think there's a very high probability you're going to come out of the first or second meeting feeling very anxious about not having a whole permanent life insurance product. And I think it's going to be less acute in the fee-only space. That type of feeling around conflict of interest or fear-based advice is going to be way less acute in the fee-only AUM space than it is in the commission-based space.

44:45Ryan Sterling:No question. Can I make one more point too on the full offering? And I also want to make this clear and I want to be careful with this because on the investing piece, as I mentioned, we are believers in low cost, tax efficient ETFs. I also say, look, tell clients all the time, do not hire us because you think you're going to get some sort of investment edge. We're not calling our clients saying we have a crystal ball and we need to lower the equity exposure right now and then get back in after market dips. Like we are not market timers by any stretch. However, I will say with the DIYers, it is not uncommon that I meet someone who is very evangelical about being DIY, everything that you're talking about.

45:33Ryan Sterling:And they show me their portfolio and it's QQQ, VTI, IVV. And is there anything wrong with that? No, absolutely not. But I can tell you that a lot of these people have never been through a lost decade. So is there value for having developed international, emerging markets, some commodities exposure, a little bit of fixed income exposure to help during those periods of volatility, especially those periods of volatility that could result in a lost decade for US stocks? I'm not saying this be a fearmonger. I'm not saying that that's the base case.

46:11Scott Trench:Right. I've been begging this drum for the last year. I look like a moron because I diversified that last year and lost out on that huge run for that portion that I diversified out of there. We've had Frank Vasquez on talking about risk parity portfolios. I completely agree that the FIRE community is one day, maybe it's this year, maybe it's next year, maybe it's in a couple of years, going to wake up and they're going to lose a huge amount of their wealth because they're an all out risky boglehead approaches, which is not congruent with early financial independence. in there unless you just get so far beyond your FIRE number that it obviates the issues of any safe withdrawal rate calculations.

46:43Scott Trench:I think it's a huge problem. We know that our community, for example, is overwhelmingly invested in stocks in a way with almost no bond or alternative exposures in many cases relative to where they say they're at on their financial independence journey. So I completely agree with that statement. And my challenge to you in response to that would be, I think it's really important to get that financial planning, especially in that transition from the accumulation to the deaccumulation phase or as you're bridging to that. But I guess I keep coming back to that question. Why AUM in that circumstance rather than flat fee to help with that problem?

47:16Ryan Sterling:So a couple of things. So number one is, you know, for the clients that we've kind of crossed over where that flat fee, that$7 ,500, which also to be fair on the other side, like if someone has a five,$10 million portfolio, like a lot of the flat fee that I see, like I've seen 10, I've seen 15, I've seen upward in$20 ,000. when you're getting up there. And it kind of makes sense because, you know, look, I'll give you an example. Like one of our clients who's close to$10 million, there's decisions that you make when you get up to that level that add a lot of value and make a big difference. So for example, one client I was referencing that's close to$10 million, you know, in a high income year recently, we did a donor advised fund.

47:55Ryan Sterling:It saved him over$50 ,000 in taxes. And it's, you know, I have another client that again is in that range where a business was sold And he needs a new accountant because his accountant didn't know what the QSBS election was. And kind of pumping the brakes and raising that has saved him$100 ,000 in taxes. When you get up to that level, decisions that you make, and again, having an appropriate allocation, is something where you can more than pay for those fees over time. Now, you could have a flat fee advisor charging$10 ,000,$15 ,000 that could do the exact same thing. I 100 % get it. I will say though, oftentimes those types of advisors, and maybe I'm wrong about this, but I feel like those advisors spend a lot more time on the planning than on the investing piece.

48:49Ryan Sterling:And a lot of those clients that they have don't want any help with the investing piece. And I think that's the nuance there.

48:57Scott Trench:This kind of brings up another question. You haven't said this. And so I don't want to put any words in your mouth. But I got this argument a lot on my LinkedIn post from financial planners, especially of the, you know, some of the folks that are of the ilk that I kind of had stereotyped in my mind. I kind of got some of the folks that I was expecting to get kind of coming in real hot on this. But there was this concept of, I'm an AUM, I'm a fee-based guy, and I'm really good. I'm really good at financial planning. And these other guys that are charging flat fee or advice, they're like discount planners.

49:30Scott Trench:They're not good at this. And you didn't get there with your comment here, but you're kind of dancing around that point a little bit from what I was thinking, where there's some things that the$10 million portfolio might need versus this one. How do I think about articulating that difference in good versus bad? Because I completely agree that if you exclude the fees, forget about the fees, hiring a good financial planner that can make sure you don't miss any of these things can be, if they're more expensive, way cheaper than hiring a bad one who creates a problem for you, doesn't really know what they're doing.

50:02Scott Trench:Like that's no debate. Is there a little bit of that in the industry where maybe at least some industry insiders feel that better planners are AUM based? Is that a bias inside the industry?

50:13Ryan Sterling:Those aren't the words that I would use, but I think that's fair to say. Look, I think there are a number of really good advisors out there that are very competent in terms of working with high net worth or ultra high net worth clients. I think there's no question about that. And as I was saying, they typically charge a much higher fee than 7 ,500. And I would say that that makes a lot of sense because as I mentioned before, that decisions that are being made have a much bigger bottom line impact. But what I typically see is those advisors tend to stray away from the investing piece of it. They tend to do really well with those clients who are, hey, I've got my passive portfolio.

50:58Ryan Sterling:I'm good on that front. I just really need help to make sure that I'm planning, make sure that I have the right estate vehicles in place, make sure asset allocation is in the right place, and to make sure that there's someone in place if something happens to me. But from what I've seen, from what I've observed, a lot of those advisors don't necessarily touch much on the investing side or really want to roll up their sleeves on that piece of it. And I think especially as you get up to those asset levels, for clients that are not sophisticated with investing, the investing piece becomes incredibly important.

51:28Mindy Jensen:When you say the investing piece and the financial plan, are you saying that these flat fee planners are just saying, hey, you should invest in some stocks. They don't say which ones they should invest in, or you should invest in this sector. And that's the kind of planning they're doing.

51:46Ryan Sterling:I think what I'm seeing more of is, hey, XYZ client who has 10 million, 15 million dollars, you're good on the investing side. You have your investing program that works for you. I'm going to make sure everything is optimized from a planning standpoint. And we're going to do and making this up an annual health check or whatever it may be, that they're really good at that. And they're not necessarily paying as much attention or really focusing on the investing side. I might be wrong on that, but that's what I've seen. I think another thing that's also important to note is that a lot of the best advisors are solo practitioners that only take a handful of clients.

52:24Ryan Sterling:And I've yet to see a firm do it at scale that can work with that eight figure clients?

52:32Scott Trench:Moving down from the eight figure range here, we had a great conversation with Bill Yon from Catching Up to Fi recently, and he hired a financial planner. This is a flat fee advisor, and that advisor manages his assets. And I think for now, I'm not going to probably hand over my assets to a financial planner to manage for me, maybe to some degree in some circumstance or whatever. But when I'm 70, I surely will do that at that point in time, right? Or that's my belief right now. I hope I'll be able to do that when that time comes, because there's a real risk as 70s and 80s and 90s come along that I'm not going to be competent to do that at that point in my life.

53:07Scott Trench:And so I'm a big believer in the case for financial planners managing their clients' investments in there. But there are also, there are flat fee, again, it comes down to the flat, how are you going to pay them, right? That's that, which is the topic at hand here, which is flat fee versus AUM in this case. Do you believe I'll just have a much harder time selecting from a quality pool of potential planners in the flat fee space than the AUM space?

53:33Ryan Sterling:My hypothesis would be yes. I'm not saying that there aren't really good flat fee advisors that also can nail it on the investing front. But from what I've seen, a lot of those planners are very, very, very, very good planners. And the investing side, either they don't want to touch, they don't manage, they have clients that don't want, in fairness, they have clients that don't want them to manage it. Or, you know, I've also seen too utilization of the robo-advisors and saying, you know, go to the wealth fronts, go to the betterments. And, you know, yeah, they're AUM, but they're much lower fee.

54:09Ryan Sterling:And, you know, it's interesting actually speaking of the robo-advisors and some of the flat fee advisors that utilize the robo-advisors, which I know that there are many out there that do. I will say we've also kind of leaned into that and said, hey, like, you know, what is the robo-advisor fee and anything from 25 to 30 basis points, or maybe when you go upscale, it's a little bit less. But we've really leaned into that to say, hey, let's use the 60 basis point fee schedule for us. If you're going to go to a robo-advisor and be charged 25 basis points, well, we can easily just say that our investments are at 25 basis points.

54:45Ryan Sterling:And then the remaining 35 basis points, that's what you get for the planning and the coaching. And the fee, if you disaggregate the fee, it probably works out to being fairly equivalent to an advisor that charges that flat fee, but then outsources to the robo advisors for the actual investing of it. Again, I'm not saying every advisor does that, but I've seen that where someone will hold themselves out saying, hey, I'm a flat fee advisor and their clients are utilizing the robo advisors.

55:10Scott Trench:Fair enough. So I'm paying you 7 ,500 bucks a year to manage my money on my$2 million portfolio or whatever. And that's cheaper than the amount of fees I'd pay in a while, but you're just then dumping my money into a high fee set of funds.

55:22Ryan Sterling:I would say high fee set of funds, but you're allocating the investing to something that's 25 basis points.

55:27Scott Trench:You think it'll be a little harder for someone shopping for a good financial planner to find a quality one in the flat fee space versus the AUM space for that period, let's call it 65 to 95, right? Where you really probably want that help, at least certainly towards the end of that time. What does good mean in that context?

55:51Ryan Sterling:Like I was saying before, someone who's going to understand asset allocation, somebody who's going to understand the importance of non-US investing, someone who's going to understand the role that fixed income plays in it, somebody who is going to have access to certain alternative vehicles to help manage volatility. Because of course, when you get to that point, you're in retirement, the sequence of return risk is incredibly important. And I even think about being an AUM advisor and certain resources that we have. For example, we're partnered with a firm that utilizes a box spread strategy to be able to do some asset-based lending at a pretty low rate.

56:32Ryan Sterling:Well, from a sequence of return risk standpoint, in a very bad year, instead of selling from the portfolio, being able to borrow using the box spread strategy at 4 % or so, at least as of right now, that's only available to AUM advisors. So I do think AUM advisors do get access to a broader suite of investments and vehicles to help manage, especially as you get up to that high seven-figure, eight-figure range.

57:02Scott Trench:So we're reaching some of the limits of my sophistication with kind of investment jargon analysis here? Because I'm pushing back from the perspective of, I think that it probably was true a few years ago that you really couldn't find a lot of the flat fee. It was a little rarer and that was still a budding industry here. But it seems like in the last year in particular, as folks have gotten, you know, smart or knowledgeable or educated about the fees that are being charged in the space, that a huge cottage industry of small firms are starting to pop up that are charging these flat fees. And that the assertion, the light assertion you're making, that it's harder relatively to find those is less true and is getting less true all the time.

57:45And that there are an abundance of quality flat fee financial planners who will manage

57:51Scott Trench:assets and who will make a great living at 7 ,500 bucks times a couple dozen or maybe up to 100 clients doing that. They'll make a great living and begin taking market share from the AUM model. What's your reaction to that school of thought? That might be true.

58:04Ryan Sterling:And I think like any industry, things evolve. I think about how the broker was replaced by more of this advisory model. There has been and there will continue to be fee compression. There's no question about that, which is also where if you look at our fee schedule, I think it's fair to say that we are on the lower side compared to what a lot of the AUM fee structures are out there. Is that fair to say?

58:28Scott Trench:Yeah.

58:28Ryan Sterling:And that's very intentional because I've been a steadfast proponent that there needs to be fee compression in this industry. We've already seen it. That's going to continue to happen. So number one is I think fees are going to continue to be compressed on the AUM side, period. Number two is if it does make a lot more sense when you're talking about the full range of the planning, coaching, and investing, and you are seeing more competitors sprout out who are doing the ultra high net worth at a fee only level and doing it really well, yeah, I think the industry might have to change. And by the way, like maybe we change with it.

59:08Scott Trench:Love it. I wanna wrap up here with one thought here around a case, a specific case where I think the AUM model may make a lot of sense because I wanna come in and say, I am not 100 % against AUM. I just came in with the bias and it was wonderful to talk with you here. I think I still have that lean, but also concede several points that you made that were really well today that kind of opened my eyes to some new possibilities here. But one specific case where I think that there's a really good argument for AUM is in the case where you know you need a kind of full service financial planning relationship.

59:44Scott Trench:And you are right on the cusp of kind of that lean or traditional fire or lean or traditional, you know, one to two and a half million dollar retirement account number. And in that case, if you're in the kind of lower end of fees, because the AUM fees wax and wane with portfolio performance, that will reduce sequence of returns risk relative to the fixed ongoing flat fee nature of a model. And so I think in some situations and some fee models comparing between some folks, there's actually a really good financial reason to go with the AUM fees instead of the flat fee in some specific instances.

1:00:21Scott Trench:Do you have any thoughts on that?

1:00:22Ryan Sterling:I think there's some truth to that. I think that does make a lot of sense. You know, look, I think when I think about what is a really good client for us, you know, it is somebody who is on the wealth building journey, who is not listening necessarily to these podcasts, is not an FI evangelist, but needs to understand that FI, as I keep saying, is mandatory. And I think that person, that avatar, who also, quite frankly, and not to pull up another point here, but one thing I've heard from clients who've come from flat fee advisors is that that evangelical piece can sometimes be off-putting, where it is a, you know what, like they went too hard to the hoop on what I need to be doing right now.

1:01:12Ryan Sterling:And I want to get better, but I don't need to do it all right now. That person who wants and needs a long-term relationship, who potentially would be subject to firing an advisor because they don't like to see that money leaving their bank account once a year or putting on the credit card, that's a really good client for us and a client that we should serve and a client that we will serve very well over a decade plus. So when I look at, again, you can go to the sequence of returns, risk, and retirement, I think there's a valid point there because AUM does scale with where the portfolio is. I totally get that, but I wouldn't hold that out as like, that's an argument to hire us.

1:01:52Ryan Sterling:The last thing I'll say is, wealth is very personal. And I think at the end of the day, people need to work with someone who they trust and who they see themselves working with in a multi-decade experience. And I think we would all agree here that if somebody finds something that works, that's seeing progress over time, like your recent guests who had actively managed mutual funds, like I would argue they shouldn't be in actively managed mutual funds, but it works for them. And I kind of get it. And I think, again, like that's our client where they need a multi-decade relationship. And the AUM model is really the model that keeps the planning, coaching, investing tied together over time.

1:02:32Scott Trench:Ryan, thank you so much for coming on and sharing this. Can you tell us where people can find out more about you?

1:02:38Ryan Sterling:Yeah, first off, thank you so much for having me. This is an absolute pleasure. Again, fan of the show. And thank you guys for all that you're doing. You can find me on LinkedIn, Ryan Sterling, or you can go to nerdwalletwealthpartners.com and you can set up a meeting with one of our advisors.

1:02:54Mindy Jensen:Ryan, I really appreciate your time. I learned a lot. I got a lot of changes to my mentality after this conversation, so I appreciate it.

1:03:03Ryan Sterling:My pleasure. Again, thank you guys so much.

1:03:05Mindy Jensen:All right, Scott. That was Ryan Sterling with NerdWallet Wealth Partners. And I got to say, Scott, I am starting to feel a little bit different about the AUM fee-based planners after this episode. I mean, I was fully not expecting to start to see the other side, but I think that AUM fees do have a place, can have a place for the right situation. If you identify with what Ryan was saying about paying your upfront advisor feels weird to take money out of your pocket now. or maybe you would just cancel it, you know, oh, that's a budget item I don't need, then maybe the AUM fee is a better choice for you.

1:03:42Mindy Jensen:Just know what you're paying. Know this upfront. I love that they put it on the first page of their reports to people. Scott, what did you think of the show? Are you sold like me? Are you more steadfast in your beliefs?

1:03:53Scott Trench:I want to say two things can be true at once. One is I thought Ryan was fantastic. I thought that was a wonderful interview. I came at him in particular hot the entire way through with question after question challenging his model. Let me know in the comments if you think I did a good job on that. But I really thought I came in pretty hot and did not let up or allow, you know, as much as I could, any separation of, of course, good financial planning services are valuable and why AUM versus flat fee is better, right? Because those are two different things, right? Good financial planning can be valuable and that does not change whether AUM fees or flat fees are better.

1:04:27Scott Trench:But I thought he did a fantastic job handling the conversation, conceded several of really important points and also made some really good points there. I am still, at the same time, not convinced that I will really ever start my search for a financial planner that charges AUM fees and certainly will continue to keep my bias against those who make money selling life insurance products or earning commissions on the sale of financial products. So that's a non-starter for me and continues to be. And I think that's pretty common as well for many of the financial planners who are fee-only and charge either hourly, flat fee or assets under management fees.

1:05:03Scott Trench:So I'm still pretty unconvinced. But again, I thought he had a really strong take here on it. So I was really impressed and really grateful for what he's contributing here.

1:05:10Mindy Jensen:I felt he made some really great points for why the AUM model would work for different types of people. I agree with you. I'm probably not going to go and get an AUM based advisor right now. But I can see more of why people do it after this conversation. So I'm really glad that he had time for us today. I thought it was a great conversation.

1:05:33Scott Trench:Yeah, absolutely. I want to call out as well that this is somebody who's actually fairly aligned with some of the things that we think about in many cases here on BiggerPocketsMoney. It's still more expensive with the AOM fees, but you can tell those are lower general fees than what we see in other financial planning services. And I need to think about and noodle on, maybe the audience can help me with some feedback in the questions or email me at scottatbiggerpocketsmoney.com. What the implications are, if you have a hundred grand to invest and you need a financial planner, if you go with a fee-only financial planner and pay that 900 bucks or whatever, is that very valuable?

1:06:03Scott Trench:Are you gonna get rejected or not get the same service as other folks? That's a question that I think still lingers for me that I don't think I did a good job of addressing in today's show, but would love some feedback on or thoughts from the audience on there because that's interesting, right? If a flat fee model is 2 ,500 bucks and a AUM fee model is 0.9 % of 100 grand and I'm getting several thousand dollars with the financial planning outputs, that makes sense on the surface, but that doesn't seem right to me. It doesn't seem like that's exactly, that's how it will actually work in practice.

1:06:32Scott Trench:Maybe it is, but I would love feedback on that.

1:06:34Mindy Jensen:Yeah, I would love to see that feedback too. So ccmindy at biggerpocketsmoney.com when you email scott at biggerpocketsmoney.com.

1:06:40Scott Trench:One of the things that I think was really interesting about what Ryan said is this concept of, if people are paying it and the service is there, I can push them to actually receive those outputs over the long haul. and I still really have a hard time with that argument, right? Hey, because the fees are deducted automatically and even though they're on the statement, they're right there, I'm sure. I'm not doubting him that they're right there on the front page. I have a really hard time with, hey, the fees are deducted, you know, automatically. The client is paying. They don't feel it coming out of their checkbook, so they don't mind paying it and therefore they stick with the relationship longer.

1:07:14Scott Trench:I have a really hard time with that particular argument. In fact, it's one of the things that I think bugs me the most about the AUM model. And that part, you know, I heard it. I don't, I believe the guy that that's how he feels about that part of the model, but it's still something that just doesn't sit right with me about the AUM model in a foundational way. That that's one of the reasons why it's so successful.

1:07:36Mindy Jensen:I'm going to push back on that, Scott, and say that you are a very logical person. And there's some people in this world who are not as logical as you. And you say to yourself, well, that's just what it costs. So it's going to come out of my pocket. It's not going to come off the top. And there are other people who say, when it comes out of my pocket, I truly believe people feel that I've got today Mindy problems, and I've got future Mindy problems, and I don't want to pay for future Mindy problems with today Mindy money. Fair enough. And if you're logical, great. Listen to Scott, do his thing.

1:08:08Mindy Jensen:If you're more Mindy-esque, then my argument makes a little more sense. And maybe the AUM model is the one for you.

1:08:16Scott Trench:That argument, I hear it. I understand it. I just can't wrap my head around it. You're right, Mindy. It's not how my brain works. It just bugs me, that particular point. And the other thing that I think is common to a lot of this is I think that some of the financial planners I talked to, and Ryan was not like this, but there has to be a little bit of this. It has to be, I'm really good at this, right? You're going to hire a lawyer who charges top dollar and here, I'm okay. You know, they're going to, they're going to tell you they're really, really good at what they do, you know, to a T in there.

1:08:45Scott Trench:And I think that that's a challenge for me to hear, you know, Hey, the really good ones, you know, are going to charge you a top dollar here. Well, what is good? What does a good financial planner do versus, you know, someone who's not, who's less good. I have a really hard time when I hear that argument or a version of that argument from a financial planner in the AUM fee or the commission space. And I think that a flat fee or hourly advisor will come in pretty hot saying, what are you talking about? I'm very good. Let me show you exactly how good I am in all of these cases. And I think it's going to be really hard for a typical person hiring a financial planner who doesn't have a very clear playbook to discern between the skill sets of financial planners.

1:09:27Scott Trench:I think it's going to be a core challenge you have to develop if you're going to hire any financial planner in any of these capacities, because they're all going to sound good to a layperson who's trying to hire that first one. I think it's a skill you're going to have to develop over time in finances and really kind of understand what you're looking for and what you're hiring for. But I'm really skeptical that the good ones are in the AUM space or the fee-based space and that the discount advisors are over here in flat fee or hourly. I just don't buy it at all. I think it's BS, frankly. Can't say the other one because we're a family-friendly podcast here.

1:09:57Mindy Jensen:I'll throw this out to everybody who's listening. If you have an advisor, what do you like about your advisor? What makes your advisor good? Or if you have let an advisor go, what made them bad? What was the thing that they did that made you say, I don't want to be with you anymore? And let's see what a good advisor looks like.

1:10:15Scott Trench:Absolutely. And by the way, last thing I want to say here on this, because I know we've been on for a long time. I do not think AUMV advisors are bad, or even that some of the commission folks are necessarily bad. There's probably great financial advisors in every one of these categories, and there's probably lousy ones as well. And so interviewing a financial advisor for their quality of their financial planning, their investment toolkit, their tax strategy, those types of things, I think is independent of the fee model that they charge. I think you can find good and bad in each of those fee models that we discussed.

1:10:48Mindy Jensen:I agree. All right, Scott, should we get out of here? Let's do it. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench. I am Mindy Jensen saying, I got a hip hop out of here.

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1:11:29Scott Trench:Rinse knows that greatness takes time, but so does laundry.

1:11:33Mindy Jensen:So Rinse will take your laundry and hand-deliver it to your door, expertly cleaned. And you can take the time pursuing your passions. Time once spent sorting and waiting, folding and queuing, now spent challenging and innovating and pushing your way to greatness. So pick up the Irish flute or those calligraphy pens or that daunting Beef Wellington recipe card and leave the laundry to us. Rinse. It's time to be great. Thank you.