I read a lot of financial Twitter (lately even football Twitter. The real one. The one played with…you guess…feet, not hands). Most of it is noise. Some of it is signal. And occasionally, you see a debate that makes you want to throw your phone out the window.
One of the classic is the clash around financial advisor fees. The usual suspects dunk on the standard 1% Assets Under Management (AUM) fee, claiming it’s the single greatest destroyer of wealth since the invention of the boat. They’ve got calculators showing that if you compound that 1% over 40 years, you lose a quarter of your nest egg. It’s a great narrative. It scares the hell out of retail investors.
And I always found it relatable. Until I read this post on Michael Kitces blog as the ultimate takedown of this argument. Go read it. It’s the “adult in the room” take on the situation.
The “Regina” Fallacy
Ramit Sethi is probably the most famous face in the US, and now probably in Europe as well, behind the crusade against AUM fees. There is a key hypothesis behind the 1% over 40 years wealth destroyer: Ramit doesn’t show you the raw cost but the cost inflated at market rates. Because the usual assumption is that, if you didn’t pay the advisor, those funds would be left compounding inside an ETF.
Ramit Sethi and the DIY crowd love to show you the “opportunity cost” of a fee. They take the fee, pretend you invested it in the S&P 500 for 40 years, and show you a scary $380,000 number. But in reality? You might have only paid $167,000 in actual cash.
Let’s apply this logic to real life.
If I spend 50 Euros a year on toilet paper (not the cheap stuff, let’s say the good, 3-ply stuff) and I compound that expense at a 7% market return over 40 years, am I going to scream at my wife in 2060 that our bathroom habits cost us 15,000 Euros?
“Honey, if we had just taken showers (or a bidet, for the lucky ones) instead of buying Regina, we’d be rich! We literally flushed a Fiat Panda down the toilet!”
Of course not. That’s absurd. You paid for a product (hygiene, hopefully) 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 of future retirement savings.”
Doing so creates an exaggerated sense of burden that blinds you to the value you actually received. When you frame every single outflow of cash as a “loss of compound interest,” you stop living a life and start living a spreadsheet.
The Invisible ROI
Deep down, the DIY clan assumes the advisor provides zero value. They think the portfolio managed by the pro looks exactly like the portfolio managed by the amateur.
This is the “Commodity Trap.” Sure, asset allocation seems commoditized. I can buy a Vanguard Target Date fund for pennies. But as soon as you start making this journey, you realise it is not that simple. It might look simple at the end, but not while you make your research and analysis. And then something you didn’t think about pops out.
But the real value of an advisor doesn’t even show up at that stage. It’s the “Invisible ROI” of:
- Tax Alpha: Proper asset location, systematic tax-loss harvesting and cash flow management. During the accumulation phase and retirement.
- Behavioral Insurance: probably the big one. But I understand is hard to believe in it after almost two decades of a bull market. After “buy the deep” never failed. After countless exchanges with readers, I can assure you no one needs to be reassured…until they have real skin in the game.
The Broken Leg Theory
They say finance is simple. Buy an index fund, chill out, save that 1%. And they’re right… until they’re wrong.
Think of it like medicine. If I have a headache, I take an Ibuprofen. I don’t need a doctor to tell me how to swallow a pill. That’s buying an ETF. It’s simple. Most people, for most of their lives, just have financial headaches.
But if I fall off a ladder and there is a bone sticking out of my leg, I am not going to watch a YouTube tutorial on how to set a compound fracture. I am not going to check Reddit for the “cheapest DIY surgery hacks.” I am going to the emergency room, and I am going to pay the surgeon whatever they want.
Finance is the same.
- The Headache: Should I buy an iPhone? Should I save for retirement? Is debt bad? (DIY this. Read a blog. You’ll be fine).
- The Broken Leg: You just inherited €2M, sold a business, have cross-border tax liabilities because you moved to France? (Call a Pro).
The complexity of your life scales with your wealth. You might start with a commoditized solution, but eventually, if you are lucky, you need someone who speaks “High Net Worth” (however you define it, you get the point). You need a guide to optimised investments, estate attorneys, tax specialists. You need a pointguard, not just a cheerleader.
The “Instalment Plan” for Trust
The real question, or ‘issue’ for many, is if the client is getting enough bang for their buck.
There is an innate structural problem in the advice business that the AUM fee solves, and few realise it. It’s the friction of the First Meeting.
The very first part of a client relationship is brutal for the advisor. It is heavy lifting. They have to download your entire life: your goals, your fears, your weird obsession with crypto, your tax situation, your family dynamics. They have to aggregate accounts and portfolios, fix the mess you, or your previous guy, made and set up a plan. It is hours of high-level work.
If advisors charged an hourly rate for that initial discovery phase, the true cost of their time, it would be a €2,500 invoice before they even suggested the first decision to take.
Nobody would pay it. Why? Because you don’t trust them yet. You aren’t going to write a check for €2,500 to a stranger just to see if you get along.
So the market settled on a recurring fee. It’s a subscription.
- For the Client: It lowers the barrier to entry. You pay a little now to test the waters. It’s frictionless. You don’t have to write a check every quarter; it just happens in the background.
- For the Advisor: It’s an investment in the relationship. They eat the upfront cost, often operating at a loss on a new client for the first year or two, because they know if they do a good job, the revenue comes later.
It’s not a conspiracy to steal your wealth. It’s 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.
A Different Solution
I’m not here to wave pom-poms for the AUM model, but there’s a reason it became the default in the wealth management world. It’s not perfect, but it’s what the market settled on: mainly because it was simple, scalable, and, for a long time, it worked for both sides. That doesn’t mean it’s the only way, or even the best way, especially now that technology is shaking things up.
Case in point: Ramit himself is backing Facet, which is basically the Netflix of financial advice. You pay a subscription, pick your membership tier, and get a menu of services. The more you pay, the more you get. At its core, it’s not that far 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 go up, but the value you get doesn’t necessarily scale with it. The issue I see is that clients see their first bill, when their assets are small, and anchor to that. Anything above feels like gravy for the advisor. But, as I explained earlier, those early bills are discounted.
Facet tries to fix this by making the costs clear up front. You know what you’re paying and what you’re getting: a fixed number of calls with an advisor, access to a dashboard, the planning. I haven’t used Facet myself, but the solution looks smart. Traditional advisors are always “on call,” and that flexibility costs money, even if clients don’t always see the value. Facet puts a number on it: X calls per year, plus messaging (which, let’s be honest, is probably handled by an AI now or soon).
The dashboard is the glue. It answers a lot of the questions that used to go straight to the advisor, and it keeps clients engaged…and paying. This is what RoboAdvisors (I guess?) missed: pairing powerful asset allocation software with real financial planning. But here’s the rub: make planning software simple and it’s useless; make it comprehensive and nobody wants to use it, because the set up is painful and not intuitive (plus there are tons of explicit and embedded assumptions that have to be clear to the user, otherwise it would be like giving a map to my 6yo daughter). The magic is in getting people hooked on the tool by having a person do the set up for them. Once they’re in, they’re less likely to bail.
Facet’s real bet is on the software, not the advisor-client relationship (again, this is me speculating). That’s a big shift. Will clients care more about personal trust, or will they be happy with a slick interface and a few calls a year? Hard to say. I doubt top advisors will give up their own brand to work for Facet, but maybe this model helps 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 biggest clients, but as more competitors like Facet pop up, it gets harder to justify. And that’s not always better for clients: because incentives matter. If your advisor is chasing subscriptions, you risk becoming just another sub.
Big picture: the world is changing. The old days of stable jobs and State-sponsored pensions are gone. People need a plan, whether they DIY it or get help. There won’t be one model to rule them all. General knowledge for the masses, specialized advice for those who need it, probably in a bunch of different flavors.
Subscription models, AUM-based or flat, aren’t going anywhere. The real question is: will your advisor be a human, an AI, or some cyborg hybrid? Stay tuned.
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