It’s one of those questions advisers ask me all the time.

“Should I be charging a flat dollar fee or a percentage of funds under management?”

They want a straight answer. To know which one’s better.

I get it.

But I’m going to tell you a story first – because it’s the reason I don’t think there’s a universal right answer.

When Percentage-Based Felt Like a Great Idea

Early in my career, I worked in a financial planning business charging purely on a percentage of funds under management (FUM).

And for a while, it was brilliant.

The market was booming. FUM was growing. Revenue was growing right along with it.

So I did what a lot of advisers do when things are going well.

I bought into a bigger practice and became an owner for the first time, funded with debt.
And that’s exactly when the GFC hit.

Markets fell. FUM fell.

And revenue and profit – the exact things we were relying on to service that loan – fell with it.

To make things harder, a big chunk of our client base were grey nomads: retirees drawing down large lump sums to buy caravans, and then the 4WD to tow them.

Which is completely fair enough. It was their money. They’d earned it, and they were allowed to enjoy it.

But here’s the thing. The work we did for those clients didn’t halve just because their balances did.

The reviews still happened. The strategy still needed to be right. The compliance still needed to be done.

And our clients still wanted the relationship – the peace of mind that comes from knowing someone is looking after everything for them.

Our income had dropped, but our workload hadn’t moved.

That’s when it really landed for me: a percentage fee ties your income – and honestly, how valued you feel – to something you don’t control and that has nothing to do with how much work you’re actually doing.

A Different Model

Years later, a different problem showed up.

When I started my own business, I found myself working with a very different client base – a lot of millennials.

They didn’t have large FUM. Some of them barely had any.

And a big part of what they wanted help with wasn’t investment advice at all.

It was cash flow, debt, insurance, structuring, decisions about buying a house or starting a family.

Under a pure percentage model, those clients could become profitable over time, as their balances built up over the years.

But that’s a hard ask when you’re a growing business carrying licensee fees and overheads, and you need the work to pay for itself now – not eventually.

Not because the advice mattered less. If anything, it mattered more at that stage of their life. But because the model was built to reward FUM, not impact.

Two Approaches, One Problem

So I want you to sit with both of those stories for a second, because they point to the same problem from two different directions.

A percentage fee can undervalue the advice you give when a client’s balance is small, and it can leave you dangerously exposed when a client’s balance drops – whether that’s a market crash or a client simply spending their own money exactly as they’re entitled to.

So Is A Flat Fee the Answer? Not Quite

You’d think the fix is obvious. Just charge a flat dollar fee for everyone and be done with it.
But that misses something important too.

When you invest money for a client, you’re taking on risk. Not financial risk in the sense of losing your own money, but professional and business risk.

Bigger balances mean bigger consequences if something goes wrong, more complexity, more scrutiny, more compliance exposure.

A flat fee that ignores FUM completely doesn’t compensate you for that.

The Model That Actually Makes Sense

The pricing structure I’ve seen work best isn’t purely one or the other.

Instead, it’s a set dollar fee, with a component built in for FUM.

The flat dollar part reflects the actual advice and service you deliver – the meetings, the strategy, the ongoing work – regardless of what the market’s doing that year.

The FUM component reflects the risk and complexity that comes with managing a larger portfolio, so you’re properly compensated for that.

It means a client with $200,000 and complex insurance and cash flow needs isn’t underpriced. And a client with $3 million isn’t paying you the same flat fee as everyone else while you carry all the extra risk that comes with that balance.

Know Your Model Before the Next Downturn Hits

I’m not going to tell you there’s one right pricing structure for every advice business. There isn’t.

But I will tell you this. If your entire revenue is riding on FUM, you need to know exactly what happens to your business the next time markets fall 30% and stay there for 18 months.

Because they will, at some point.

I’m not saying this to scare you. Instead, it’s to make sure you’re deciding on purpose, and not finding out the hard way like I did.

My Challenge To You

This week, pull up your fee structure and ask yourself two questions.

If markets dropped 30% tomorrow, what would happen to my revenue?
Am I properly compensated for the clients doing the most complex work with me, regardless of their FUM?

And is there anyone out there you could genuinely add value to, but you’ve turned away because 1% of their FUM wouldn’t have made it worth your time?

If any of those answers make you uncomfortable, that’s worth a proper look.

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P.P.S. Wondering how to get more ongoing service clients? Start here.