In this guide, we break down this concept so you fully understand how to calculate AUM fees. Investing with a financial advisor is not free, but it's probably a lot more affordable than you may realize. You don't really have to pay a fee on top of your assets under management. Instead, this percentage fee is automatically withdrawn from your account as your wealth grows throughout the year. It's almost like the percentage fee is being scraped off the top of your gains. Some advisors will take the fee on a monthly or quarterly basis, while others may opt for a different frequency of charging their AUM fee.
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AUM fees, also known as asset-based fees, refer to the annual percentage fee charged by a financial advisor or wealth manager based on the total assets they are managing for a client. The fee is typically charged on a quarterly basis and calculated as follows:
((AUM Fee %) x (Average Account Value)) ÷ 4 = Quarterly AUM Fee
For example, if an advisor charges a 1% AUM fee and manages a portfolio worth $1,000,000 on average, the quarterly AUM fee would be:
0.01 x $1,000,000 ÷ 4 = $2,500
The AUM fee compensates the advisor for the ongoing management of the portfolio and advisory services provided. As the portfolio value increases over time, the total AUM fee collected also increases.
This is just an example of AUM breakpoints and does not reflect what your advisor will charge. You can negotiate these fees with your individual advisor.
Advisors may also charge separate fees for financial planning. This can range widely: advisors may charge a flat-fee for planning, or an hourly rate.
👉 Read our guide on questions to ask your advisor in your first few meeting.
Full transparency: the AUM fee reduces your net investment returns. The fee is a drag on performance, but may be justified by the value added from the advisor's services. When evaluating advisors, look for those who can add enough value to exceed the cost of their fees and maximize your after-fee returns. Ask advisors to explain how they aim to earn their fees and add value.
Advisors are incentivized to grow client assets under management because their fees increase as the assets grow. Most advisors charge AUM fees as a percentage of assets, so if the portfolio doubles in value, the advisor's fee also doubles. This motivates advisors to provide investment advice and services aimed at increasing the value of client accounts over time. The interests of advisor and client are aligned, as both benefit from growth in assets. However, clients should still pay attention to an advisor's investment strategy and performance to ensure the focus remains on prudent growth rather than taking excessive risks. Discussing an advisor's fee structure and incentives can help give clients peace of mind that their interests are being prioritized.
Commissions and hourly rates are two other common compensation models for financial advisors, and each has pros and cons compared to the AUM fee model.
With commissions, advisors earn a percentage of the fees and costs associated with buying or selling an investment product. This can incentivize advisors to recommend transactions that may not be in a client's best interest but generate larger commissions. The AUM model aligns advisors with growing client assets.
Hourly fees compensate advisors for their time spent providing financial advice and planning. This model incentivizes advisors to deliver customized advice and spend adequate time on financial planning. However, it does not directly incentivize growing client assets like the AUM model does. Hourly fees also require clients to closely track advisor hours and can become expensive for ongoing portfolio management.
The AUM model provides advisors recurring revenue that increases as client assets grow. This incentivizes a focus on long-term asset growth rather than short-term transactions. However, clients should still evaluate if an advisor's AUM fee schedule and investment strategy are reasonable for their needs.
🟣👉 Here's our detailed breakdown on typical fee structures for financial advisors.
While AUM fees are common, a flat annual fee model may be preferable in certain situations:
The optimal fee structure ultimately depends on your unique needs and the value provided by the advisor. Assess your personal situation, advisor relationships, and portfolio management preferences when deciding if an AUM or flat fee model is more appropriate for you.
Understanding AUM fees and their implications is crucial when working with a financial advisor. These fees, charged as a percentage of assets under management, are directly tied to the performance of your investments. While they align advisor incentives with client goals, they can also be a drag on net returns. It's important to evaluate the total costs, including hidden fees and the potential impact on investment returns. Alternatives like flat fees or hourly rates may be more suitable in certain scenarios. Regularly reviewing your portfolio and advisor relationship, along with careful negotiation of AUM fees, can help ensure you receive value commensurate with the costs. Always consider the full scope of services provided and the overall value an advisor brings to your financial planning and investment management.