Rethinking Financial Advisor Compensation Plans Based on AUM: What Works Best in Today’s Market?

In today’s competitive wealth management environment, structuring an effective compensation plan for financial advisors is more than just an HR issue—it’s a strategic necessity. The dominant model in the independent advisory world remains assets under management (AUM)-based compensation. While widely used, this model continues to evolve, and how firms implement it can determine their ability to attract, retain, and incentivize top-tier advisory talent.

The Foundation: What Is AUM-Based Compensation?

At its core, AUM-based compensation pays advisors a percentage of the assets they manage. This model is attractive because it aligns the advisor’s interests with those of the client: as the client’s assets grow, so does the advisor’s income.

Typical payout percentages for advisors range from 20% to 50% of the revenue they generate, depending on their role (rainmaker vs. service advisor), their book of business, and their position within the firm. However, percentages alone don’t tell the full story—structure, incentives, and long-term strategy matter just as much.

Why AUM-Based Models Still Dominate

Despite the rise of flat-fee and subscription models, AUM-based plans remain the industry norm for several reasons:

• Simplicity and Transparency: Clients and advisors both understand the linear relationship between asset growth and compensation.

• Scalability: This model supports growth for firms that can attract high-net-worth individuals or scale through inorganic strategies like acquisitions.

• Incentive Alignment: It encourages advisors to grow client portfolios, keeping everyone focused on performance and asset retention.
  

However, firms need to tread carefully. Misalignment, outdated percentages, or lack of role clarity can create friction and lead to advisor dissatisfaction or even attrition.

Factors Influencing the Right Payout Structure

Designing the right AUM-based compensation model depends on multiple variables:

1. Rainmakers vs. Relationship Managers: Advisors who bring in new business (rainmakers) often command higher payouts than those focused on maintaining existing client relationships.

2. Firm Overhead and Profitability: Advisory firms must strike a balance between paying advisors competitively and preserving firm margins.

3. Team-Based Incentives: Increasingly, firms are shifting to collaborative structures where payouts consider team contribution rather than just individual production.

4. Client Tiering: Some firms differentiate payouts based on the type or size of clients being managed, rewarding advisors for cultivating more profitable relationships.
   

Evolving Toward a Hybrid Model

The most innovative firms are building hybrid compensation structures that blend AUM with incentives for client satisfaction, business development, and strategic initiatives. These models are especially attractive to next-generation advisors who value impact and career growth as much as financial rewards.

Some firms are also experimenting with equity participation, deferred compensation, or profit-sharing models to retain key team members long-term and promote a sense of ownership.

Compensation as a Strategic Growth Lever

Firms that treat compensation as a core part of their growth strategy—not just a cost—are seeing the biggest wins. A well-designed plan doesn’t just pay advisors fairly; it:

• Attracts top talent from competing firms

• Creates a performance-driven culture

• Encourages cross-selling and teamwork

• Aligns long-term firm goals with advisor behavior
  

At Select Advisors Institute, we work closely with RIAs, broker-dealers, and independent firms to assess, design, and optimize compensation plans that scale with the business and foster advisor loyalty.

Final Thoughts

As the financial advisory profession matures, compensation models must do more than reward production—they must support sustainability, retention, and strategic alignment. While AUM-based compensation remains central, how it’s structured can make the difference between a firm that survives and one that thrives.

Whether you're reevaluating your current structure or designing one from scratch, make sure your compensation plan reflects where your firm is today—and where you want to go tomorrow.