I read a lot of financial Twitter (lately even football Twitter. The real one. The one played with… you guessed it… feet, not hands). Most of it is noise. Part of it is a signal. And every now and then you see a debate that makes you want to throw your phone out the window.
One of the classics is the clash over financial advisor compensation. The usual suspects take the standard 1% Assets Under Management (AUM) fee and claim it is the biggest destroyer of wealth since the invention of the boat. They have calculators that show that if you add up that 1% over 40 years, you will lose a quarter of your savings. It’s a great story. It scares the hell out of private investors.
And I’ve always found it recognizable. Until I read this message on Michael Kite’s blog as the ultimate debunking of this argument. Go read it. It’s the “adult in the room” view of the situation.
The ‘Regina’ fallacy
Ramit Sethi is probably the best known face in the US, and now probably in Europe, behind the crusade against AUM fees. There is an important hypothesis behind it 1% over 40 years wealth destroyer: Ramit does not show you the raw costs, but the costs inflated at market rates. Because the common assumption is that if you don’t pay the advisor, these funds would remain in an ETF.
Ramit Sethi and the DIY crowd are happy to show you the ‘opportunity cost’ of compensation. They take the fee, pretend you invested it in the S&P 500 for 40 years and show you a scary number of $380,000. But in reality? You may have paid only $167,000 in cash.
Let’s apply this logic to real life.
If I spend $50 a year on toilet paper (not the cheap stuff, let’s say the good, three-ply stuff) and I add that cost up to a 7% market return over 40 years, am I going to yell at my wife in 2060 that our bathroom habits are costing us $15,000?
“Honey, if we had just taken a shower (or a bidet, for the lucky ones) instead of buying Regina, we would be rich! We literally flushed a Fiat Panda down the toilet!”
Of course not. That’s absurd. You paid for a product (hopefully hygiene) and you moved on. You don’t calculate the lost market returns on your grocery bill. You don’t look at your iPhone and say, “This didn’t cost me $1,000; it cost me $18,000 in future retirement savings.”
Doing so creates an exaggerated sense of burden, blinding you to the things you do value you actually received. When you consider every outflow of cash as a “loss of compound interest,” you stop living and start living a spreadsheet.
The invisible ROI
Deep down, the DIY clan assumes that the consultant will provide zero value. They find that the portfolio managed by the professional is exactly like the portfolio managed by the amateur.
This is the ‘commodity trap’. Certainly, asset allocation seems commoditized. I can buy a Vanguard Target Date fund for pennies. But once you start taking this journey, you realize it’s not that easy. It may look simple at the endbut not while you are conducting your research and analysis. And then something comes up that you haven’t thought about.
But the real value of an advisor does not even come to light at that stage. It is the “invisible ROI” of:
- Tax alpha: Good asset location, systematic tax losses and cash flow management. During the accumulation phase and retirement.
- Behavioral insurance: probably the big one. But I understand it’s hard to believe in that after almost two decades of a bull market. After “buy the deep” it never failed. After countless exchanges with readers, I can assure you that no one needs to be reassured… until they have a real role in the game.
The broken leg theory
They say finance is simple. Buy an index fund, relax, save the 1%. And they’re right… until they’re wrong.
Think of it as a medicine. When I have a headache, I take Ibuprofen. I don’t need a doctor to tell me how to take a pill. That’s buying an ETF. It’s simple. Most people have nothing but financial headaches for most of their lives.
But if I fall off a ladder and there’s a bone sticking out of my legI’m not going to watch a YouTube tutorial on how to set up a compound fraction. I’m not going to check Reddit for the “cheapest DIY surgery hacks.” I’m going to the emergency room and I’m going to pay the surgeon whatever they want.
Finances are the same.
- The headache: Should I buy an iPhone? Should I save for my pension? Is Debt Bad? (Do this yourself. Read a blog. You’ll be fine).
- The broken leg: You just inherited €2 million, sold a business and cross-border tax liabilities because you moved to France? (Call a professional).
The complexity of your life scales with your wealth. You could start with a commoditized solution, but eventually, if you’re lucky, you need someone to speak.”High net worth“(however you define it, you know what I mean). You need a guide to optimized investments, real estate lawyers, tax specialists. You need a point guard, not just a cheerleader.
The “payment plan” for trust
The real question, or ‘problem’ for many, is whether the customer is getting enough value for their money.
There is an innate structural problem in the consulting industry that the AUM fee solves, and few realize it. It’s the friction of the first meeting.
The very first part of a client relationship is brutal for the advisor. It’s heavy lifting. They need to download your entire life: your goals, your fears, your weird obsession with crypto, your tax situation, your family dynamics. They need to merge accounts and portfolios, fix the mess you or your previous husband made, and put a plan in place. It’s hours of work at a high level.
If advisors were to charge an hourly rate for that initial discovery phase, the true cost of their time, it would be a $2,500 bill before they even proposed the first decision.
No one would pay for it. Why? Because you don’t trust them yet. You’re not going to write a $2,500 check to a stranger just to see if you can get along.
So the market settled on a recurring fee. It’s a subscription.
- For the customer: It lowers the barrier to entry. You now pay a little to test the waters. It is frictionless. You don’t have to write a check every quarter; it just happens in the background.
- For the advisor: It is an investment in the relationship. They eat the initial costs and often work at a loss for the first two years with a new client, because they know that if they do a good job, the returns will come later.
It’s not a conspiracy to steal your wealth. It is an economic equilibrium. It aligns the advisor’s need for a stable business with the client’s need for a low-risk way to engage an expert.
Another solution
I’m not here to wave pom-poms in favor of the AUM model, but there is a reason why it has become the standard in the wealth management world. It’s not perfect, but it’s what the market focused on: mainly because it was simple, scalable, and it worked for both parties for a long time. That doesn’t mean it’s the only or even the best way, especially now that technology is shaking things up.
Example: Ramit himself is supportive Facetthat’s actually the Netflix of financial advice. You pay a subscription, choose your membership level and get a menu of services. The more you pay, the more you get. At its core, it’s not that far removed from AUM, just with a few tweaks… but a lot more transparency.
One of the classic knocks on AUM is that as your portfolio grows, your fees increase, but the value you get doesn’t necessarily grow with it. The problem I see is that customers see their first bill, when their assets are small, and… anchor to that. Anything above that feels like gravy to the advisor. But as I explained earlier, those early bills are discounted.
Facet tries to solve this by making the costs transparent in advance. You know what you pay and what you get: a fixed number of conversations with an advisor, access to a dashboard, the planning. I haven’t used Facet myself, but the solution looks clever. Traditional advisors are always available, and that flexibility costs money, even if customers do not always see the value in it. Facet puts a number on it:
The dashboard is the glue. It answers many of the questions that used to go straight to the advisor, and it keeps customers engaged… and paying. Here’s what RoboAdvisors (I think?) missed: coupling powerful asset allocation software with real financial planning. But here’s the problem: make scheduling software simple and useless; make it comprehensive and no one will want to use it because the setup is painful and unintuitive (plus there are tons of explicit and embedded assumptions that need to be clear to the user, otherwise it would be like giving my six-year-old daughter a card). The magic is in getting people hooked on the tool by having someone do the installation for them. Once they are inside, they are less likely to be released on bail.
Facet’s real bet is on the software, not on the advisor-client relationship (again, this is just me speculating). That’s a big shift. Will customers value personal trust more, or will they be happy with a slick interface and a few phone calls a year? Hard to say. I doubt top consultants will give up their own brands to work for Facet, but perhaps this model will help the technically brilliant, less marketable types turn their passion into a job. Maybe it works in the US, where scale is real and possible, but struggles in fragmented Europe.
AUM is still a strong incentive for advisors to focus on their largest clients, but as more competitors like Facet emerge, it becomes harder to justify this. And that is not always better for customers: because incentives matter. If your advisor chases subscriptions, you run the risk of becoming just a sub.
Big picture: the world is changing. The old days of stable jobs and state-funded pensions are over. People need a plan, whether they make it themselves or seek help. There won’t be one model that rules them all. General knowledge for the masses, specialized advice for those who need it, probably in a lot of different flavors.
Subscription models, whether AUM or flat, aren’t going anywhere. The real question is: will your advisor be human, AI, or a cyborg hybrid? Stay informed.
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