I’m glad to hear you’re happy with your adviser. But I worry that many retirees who are billed as you describe are paying too much for the help they’re receiving. That’s because they don’t understand how these particular fees actually work—and/or because they fall victim to inertia.

This question refers to “assets under...

In a recent column about financial advisers, you noted that their fees are increasing. My planner’s fee, as is common, is based on the size of my nest egg. My questions: What’s your opinion about calculating fees in this way? Is this a good method? Is there a better one? I’ve done well with my adviser through the years.

WSJ

I’m glad to hear you’re happy with your adviser. But I worry that many retirees who are billed as you describe are paying too much for the help they’re receiving. That’s because they don’t understand how these particular fees actually work—and/or because they fall victim to inertia.

This question refers to “assets under management,” which, as you indicate, is how many advisers are paid. With this method, advisers multiply their fee—typically 1%—by the amount of money they’re managing. If you have, say, $1.5 million in assets, the adviser’s annual fee is $15,000. In a 2020 survey by Bob Veres, a financial-planning consultant in San Diego, almost three-quarters of advisers (72.9%) said their fees are tied primarily to the assets they manage.

It’s a model that clients and advisers alike have embraced for many years. On its surface, the practice seems equitable: If your nest egg does well—if your holdings rise in value—your adviser’s compensation rises, as well. (Of course, if your portfolio falls in value, your adviser still collects a fee, albeit smaller. That’s how it works.) Clients also like the idea that someone, in theory, is monitoring their finances regularly and that they can pick up the phone whenever they wish and ask their adviser a question.

SHARE YOUR THOUGHTS

What fee structure do you use with your adviser? Join the conversation below.

If you look closely, though, assets under management is a peculiar way of charging people for a service.

Let’s say two neighbors with similar homes develop similar leaks in their basement pipes. A plumber arrives, figures out what’s needed and quotes a fee, based on his labor and materials. The bill, presumably, will be similar for both homeowners. It’s a process we all know and understand.

But, let’s say this same plumber decides to charge customers, well, differently. He enters the first house, looks at the leak, and, when asked for an estimate, says: “First, tell me how much money you have.” The homeowner (confused, but polite) replies: “I have $100,000.” At which point, the plumber says: “My fee is $1,000.”

The plumber then heads next door and asks the second neighbor the same question: How much money do you have? This neighbor answers: $200,000. At which point the plumber says: “For you, my fee is $2,000.”

That, in effect, is how assets under management works. The fee isn’t based so much on the actual work involved; rather, it’s based on the size of your holdings—which shouldn’t have much, if anything, to do with what you’re being charged. (Does your dentist ask you how much money you have before he works on your teeth?) In this case, neighbor No 2. is paying twice as much for essentially the same labor and materials simply because he has more money.

So it goes with financial planning. An adviser whose fee is 1% will do much the same work for a retiree with $1 million and one with $2 million, but will charge the former $10,000 annually and the latter $20,000. Worse, the person paying the larger fee could be subsidizing the person paying the smaller fee without knowing it.

In other words, let’s say the retiree with $2 million calls the adviser once or twice a year—and the retiree with $1 million badgers the adviser weekly. As such, the $20,000 fee from the low-maintenance client helps pay for the extra work the adviser is doing for the high-maintenance client.

There’s also the issue of changing needs. If you’re a new client—again, with a $2 million portfolio—your adviser, in theory, could have her hands full the first year: organizing your investments, getting your estate plans in order, guiding you through decisions about Social Security and Medicare, etc. In this case, the adviser’s first-year fee of $20,000 could be worth every penny.

In the second year, though, as well as subsequent years, odds are good the adviser has less to do; her role, in theory, could simply involve maintenance, tweaking your finances as needed. Her annual fee, though, is still $20,000 (or more, assuming your nest egg remains at or above the $2 million level).

Is any or all of this “wrong?” Not necessarily. Many advisers work hard for their money and help their clients lead successful financial lives. And yes, large, complicated portfolios—say, a retiree with a family business and extensive real estate holdings—could involve lots of time and effort. And, as such, lots of fees.

ASK A QUESTION

Have a question about planning for and living in retirement? Email askencore@wsj.com.

That said, the number of fee models in the financial marketplace is growing; there are options other than assets under management. (For instance, search online for: “The Future of Fees: Eight New Models” by Matthew Jackson,

a chartered financial analyst.) At the very least, anyone working with a financial adviser should understand clearly how fees work. And they should be willing to ask their adviser: “Why exactly am I paying the fees I’m paying? Can you quantify the value of your services?”

And, when it comes to assets under management, in particular, you should be willing to ask: “Why are you charging me and others different amounts for essentially the same work?”

Here, of course, is where inertia kicks in. Let’s face it: We get comfortable with our advisers. Ideally, we like them. We like the occasional phone call or newsletter we receive from their office. We like the annual sit-down, where our adviser walks us through our finances. And so we tend to stick with our advisers. And, naturally, we keep paying their fees.

Don’t misunderstand: I’m not suggesting that you should break with your particular adviser. Again, I’m glad you’ve done well by him or her. But I am suggesting that—again, given the different ways today you can pay for financial help—you owe it to yourself to ask: Am I paying too much for the help I’m receiving?

Mr. Ruffenach is a former reporter and editor for The Wall Street Journal. Ask Encore examines financial issues for those thinking about, planning and living their retirement. Send questions and comments to reports@wsj.com.