“How do you get paid, and how much does it cost?”
Every investor should ask this question when working with a financial professional. But too often, the answers are murky. If an advisor can’t clearly explain their compensation in simple dollar terms, that’s a red flag—they’re either dodging or don’t fully understand how they’re paid. Neither is acceptable.
Understanding how much you’re paying matters because costs are one of the most controllable drivers of long-term investment outcomes. Despite the persistent myth that higher fees equal higher quality, the data consistently shows the opposite: lower costs often lead to better results.
Exhibit 1*
It’s no surprise, then, that more investors (both individual and institutional) are asking tougher questions about fees. And they should.
Two Layers of Cost: What You Actually Pay
When working with a financial advisor, there are two distinct levels of cost:
Advisor Fees - What you pay the professional directly.
Investment Fees - The internal costs of the funds or ETFs inside your portfolio.
Understanding and managing both is essential to maximizing long-term wealth.
Level 1 Advisor Fees - How your advisor is paid:
Most advisors charge in one of three ways:
Transaction Commissions: Fees earned when buying or selling investments.
AUM Fees (Assets Under Management): A percentage of assets under management, typically around 1%.
Flat Fees: A clear, fixed-dollar amount for services and advice.
While commissions and AUM models dominate the industry, flat fees are the most transparent and aligned with investor outcomes. Here's why:
The Problem with Commissions
Commission-based models are loaded with conflicts of interest. Advisors are incentivized to sell—not necessarily to advise. These commissions are often buried in product costs, especially with mutual funds, annuities, or insurance products.
If you hear terms like “load,” “trail,” or “deferred sales charge,” press for details, or consider walking away altogether.
AUM Fees: More Transparent, But Still Misaligned
AUM-based fees charge a percentage of your portfolio’s value, whether or not your advisor does more work. For example, a $2 million portfolio with a 1% AUM fee means paying $20,000 annually.
This model has several key drawbacks:
Wealth Tax Effect – As your portfolio grows, so do your fees—even if your advisor’s workload doesn’t.
Drag on Compounding – Higher fees every year significantly reduce long-term portfolio growth.
Conflicted Advice – AUM advisors may push to manage all your assets, even when other strategies may be better for you.
The AUM model is great for advisory firms. It’s less ideal for clients seeking cost efficiency and objective advice.
The Flat-Fee Advantage
Flat fees offer a fixed, transparent price for advice, independent of portfolio size. That simplicity has real advantages:
Clear Costs: You know exactly what you’re paying, no sliding scales or hidden expenses.
No Tax on Growth: Your investments grow without being shaved down by percentage-based fees.
Aligned Incentives: A flat-fee advisor is compensated for their advice and service, not for gathering assets or pushing products.
If you're a high-net-worth investor focused on minimizing drag and maximizing alignment, a flat-fee model is often the best fit.
Want to see the difference? Use our fee comparison tool to run the numbers.
Level 2: Investment Fees – What Your Funds Cost
Even with a flat-fee or fiduciary advisor, your investments still carry internal costs, known as expense ratios. These are embedded in mutual funds, ETFs, and other investment vehicles and cover the cost of fund management, trading, and administration. You pay these even if you manage your portfolios yourself.
Here’s what many investors miss: The difference between a low-cost index fund and a high-cost actively managed fund can quietly erode your wealth, even if both deliver the same market return.
Why Higher Fees Don’t Mean Better Performance
Contrary to popular belief, paying more doesn’t mean getting more. In fact:
Actively managed funds, on average, fail to outperform their benchmarks
After fees, taxes, and trading costs, the odds of consistent outperformance fall even further
High-cost funds often have higher turnover, creating tax inefficiency and further drag
So investors aren’t just overpaying, they’re often overpaying for underperformance.
That’s why many institutional investors, retirement plans, and evidence-based advisors favor low-cost, passive strategies. They’re tax-efficient, low-turnover, and designed to capture market returns—not try (and usually fail) to beat them.
A Quick Cost Comparison
According to Morningstar:
The average actively managed fund charges around 0.66% per year.
The average index fund or ETF charges just 0.05%.
On a $2 million portfolio, that’s the difference between paying $13,200 a year vs. $1,000 on expense ratios.
Costs Matter
You can’t control market returns, interest rates, or economic conditions. But you can control how much you pay for advice and investments, and those dollars compound just like your returns.
If your advisor can’t clearly explain how they’re paid, what you’re paying, and what you’re getting in return, it may be time for a second opinion. Not sure where to start? Here’s a guide to evaluating financial advice so you can make an informed decision.
Flat-fee advice and cost conscious investing isn’t just about cost savings, it’s about transparency, alignment, and long-term value. Because when it comes to building wealth, paying less often means keeping more.
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*The sample includes funds at the beginning of the 10-, 15-, and 20-year periods ending December 31, 2018. Funds are sorted into quartiles within their category based on average expense ratio during the sample period. The chart shows the percentage of winner and loser funds by expense ratio quartile for each period. Winners are funds that survived and outperformed their benchmark over the period. Losers are funds that either did not survive or did not outperform their respective benchmark. US-domiciled open-end mutual fund data is from Morningstar. Past performance is no guarantee of future results. https://www.dimensional.com/us-en/insights/the-fund-landscape
Disclaimer: This content is for informational purposes only and is not intended to provide personalized financial, tax, or investment advice. While we strive to ensure accuracy and relevance, all investments involve risk, and past performance is not indicative of future results. Any strategies or opinions discussed may not be appropriate for your individual circumstances. For personalized advice, please consult with a qualified financial advisor.