Understanding Asset-Based Advisory Fees

It is a give-and-take world. If you hire a financial advisor hoping to benefit from their expertise, experience, and qualifications, you need to compensate them. Nothing in life comes for free, and advisory fees are no exception.

Advisory fees can come in different forms – a flat fee, a commission, or sometimes based on the assets you have under management. In this article, we will focus on asset-based fees in financial planning. So, without further ado, let’s dive into how asset-based pricing actually works.

What do you mean by an asset-based investing fee?

One way a financial advisor can charge for their services is through an asset-based pricing model. This type of fee is calculated as a percentage of the assets they manage for you. These assets are often referred to as assets under management (AUM).

Let’s first understand what AUM is.

AUM measures the market value of the investments that a financial advisor or firm directly manages for you. It does not include money they advise on indirectly or funds managed elsewhere. It only counts what is actively under their control. For example, say you have an advisor who manages your stock portfolio. In this case, AUM would represent only the value of the stocks under their supervision. If you also hold some real estate holdings, but the advisor is not managing them, they would not be counted as part of your AUM.

Now, let’s move on to how assets under management fees work.

An asset-based fee in financial planning is simple in concept – the more, the merrier. The more money you give the advisor to manage, the higher the fee. How does this work?

Let’s say you have $1 million invested with a firm that charges a 1% asset-based fee. That would result in you paying $10,000 per year for their services. While this might sound like a lot, you should remember that this fee is in exchange for professional guidance, ongoing support and management, regular portfolio rebalancing, and assurance that your long-term plan will stay on track. Essentially, the financial advisor’s success would be tied to your portfolio’s performance. This is where the more, the merrier concept comes in. The better your investments do, the more you will both benefit.

The exact asset-based pricing model for these financial advisors can differ. A traditional financial advisor could charge around 1% annually. On the other hand, robo-advisors charge between 0.25% and 0.50% per year. Both of these advisor fees would cover ongoing portfolio management, financial planning, regular guidance, and give you access to a team or dedicated advisor who would help you stay on track with your investment goals.

In the United States, financial advisors and firms that manage client assets must follow specific regulations depending on the size of their AUM. The U.S. Securities and Exchange Commission (SEC) has mandated firms with AUM between $25 million and $110 million to register with it. The exact requirement depends on several factors, including the size of the firm, where it operates, and the services it provides.

For smaller firms, state securities regulators oversee advisers handling up to $100 million in assets. If a firm’s AUM is below this threshold, it must register with the securities regulator in the state where its main office is located. Once a firm grows beyond $100 million, it may choose to register with the SEC, and if it surpasses $110 million, SEC registration usually becomes mandatory.

What should you know about asset-based fees in financial planning before opting for this model?

Asset-based fees are not quite as simple as they might first appear. Essentially, these fees are tied to the assets under management that a financial advisor or firm handles for you. Many financial advisory firms, mutual funds, and brokerages set their fees as a fixed percentage of the AUM. Normally, the larger your investment portfolio, the higher the fee you might pay.

Seems straightforward, right?

But there are several little things you need to understand before choosing this model.

One important thing to know is that the relationship between AUM and fees is not always as simple as it may look. You might assume that as your AUM grows, your financial advisor automatically earns more, and that is generally true. But fees can vary depending on the type of investment product and client. For example, actively managed funds usually charge higher fees than passively managed funds. This is because active funds require more research and monitoring. On the other hand, passively managed funds, like index funds, have lower fees because they simply track a market index with minimal intervention.

You should also know that asset-based pricing models like AUM are quite flexible, and fees are not always fixed. In fact, large investors, such as high-net-worth individuals, can obtain discounts, reducing costs and increasing net returns over time. Even though the portfolio’s value may be higher than the average person’s, large investors can negotiate lower fees. Many advising firms are willing to reduce rates to secure big accounts. Sometimes, financial advisors may lower fees to attract new, sizable clients. So, if you have a large portfolio, it is worth exploring whether you can negotiate a lower fee. You never know, you might just get a good discount.

Another aspect to keep in mind when considering fee-based asset management models is what counts toward your AUM. While it usually includes investments managed directly by the financial advisor, some firms also factor in related accounts, such as your bank account balance or other investment funds and accounts they advise on. This is sometimes called Assets Under Advisement (AUA). Essentially, it includes everything the financial advisor helps you manage, even if they do not directly control it. This can affect your fees, so make sure you ask exactly which assets are included in the calculation.

It is also important to understand what your asset-based fee actually covers. In many cases, the fee includes portfolio management, ongoing financial advice, portfolio rebalancing, and sometimes access to a team of experts or specialized services. But not all firms include the same services. Some may charge additional fees for financial, tax, or estate planning. So, while the percentage of AUM might look reasonable, your actual costs could be higher depending on what is included in your agreement.

Pros of asset-based fees in financial planning

When you work with a financial advisor charging an asset-based fee, their compensation comes entirely from you, the client. There are no commissions tied to the products they recommend, so you do not have to worry about biased financial advice or being recommended investments that may not exactly benefit you.

Asset-based fee structures typically include a comprehensive suite of services. You get full financial planning support. This can include tax planning, retirement planning, portfolio rebalancing, education planning for your children, healthcare planning, and estate planning. Because the advisor is compensated for the overall management of your assets, they leave no stone unturned.

Typically, fee-only advisors who charge an assets-under-management fee have an industry average of around 1% per year. This percentage often decreases for larger portfolios, such as those over $1 million. So, the more assets you invest, the lower the percentage you might pay. What’s particularly appealing is that this fee structure gives you a clear picture of costs from the very beginning. You know what you will be paying, which makes budgeting and planning ahead easier.

Another major advantage of the AUM model is that it aligns the financial advisor’s interests with yours. As your portfolio grows, so does the advisor’s compensation. This naturally pushes them to increase your wealth over time. Essentially, both you and your advisor benefit when your investments perform well.

Cons of asset-based fees in financial planning

Asset-based fees also come with a few drawbacks that are important to understand before choosing this model. One of the main concerns is how the advisor gets paid. Since their fee is tied directly to the size of your portfolio, they earn more when your assets stay invested and continue to grow. Because of this, there may be situations where an advisor may not want you to withdraw or liquidate your assets, even when it might make sense to do so at the time. For example, paying off high-interest debt, helping a dear family member, or just paying for something out of your pocket instead of using a credit card. Withdrawing money reduces assets under management, thereby reducing the advisor’s fee.

Another downside is the long-term cost. A 1% annual fee may not seem like much now. But as your portfolio grows, that fee grows with it. The more successful your investments are, the more you end up paying your advisor each year. Over the decades, these fees can add up.

There is also a difference between your investments performing well and your wealth crossing into a higher net-worth category. As your portfolio value increases, the amount you pay in AUM fees rises, even if the level of service stays the same. In some cases, this can result in paying more than you would with a flat-fee or hourly advisor.

Is an asset-based advisory fee right for you?

Asset-based investing fee models can work in your favor in certain situations. They make sense if you are a high-net-worth individual, since the percentage fee may be lower at higher asset levels. They can also be suitable if you prefer a clear, upfront payment structure where you know roughly what you will pay to the advisor. Another advantage is that this model usually comes with comprehensive services. So, you get all your needs met with the same advisor.

That said, asset-based pricing can be tricky. The exact amount you pay can change from year to year, depending on the size of your portfolio and how the market performs. Your costs are not exactly fixed, and you may end up paying more if your portfolio grows.

The key is to understand exactly how the fee works and how it could impact your long-term returns. So, run the numbers on a calculator to see the real cost over time and decide whether it fits your situation.

Once you have made up your mind, you may use our financial advisor directory to hire a financial advisor.

Frequently Asked Questions (FAQs) about asset-based fees in financial planning

1. What are the main things to consider when hiring a financial advisor who charges an assets under management fee?

One of the biggest things to understand is how this arrangement truly works. With an AUM fee, your advisor earns more when your portfolio grows. This can be a good thing because it aligns their interests with yours. They want your money to grow just as much as you do.

At the same time, it can sometimes create a bias. They may lean toward growth-focused strategies, as they could help them earn more.

2. I have a portfolio valued at $10,000. How much AUM fee will I pay?

If a financial advisor charges around 1% per year, you would pay roughly $100 annually on a $10,000 portfolio. However, keep in mind that this is just an estimate. AUM fees can vary from advisor to advisor and depend on the size of your portfolio.

3. Is an hourly or flat fee better than asset-based pricing?

It depends on what you are looking for. Hourly or flat-fee advisors charge by the hour or by a fixed fee, not based on the size of your portfolio. An AUM fee includes ongoing, long-term financial planning support. The better option is whichever of these matches your needs and preferences.

4. Are all asset-based financial advisors fiduciaries?

No, not all asset-based financial advisors are fiduciaries. In fact, a financial advisor’s fee structure does not automatically determine whether they are a fiduciary. So, you must also check and confirm whether the advisor has a fiduciary duty.