Also called: Assets under management fee, Advisory fee.
The AUM model is the default in wealth management. You hand over a portfolio, and each year a percentage of it is taken. The bill scales with the balance, so the same advice costs twice as much on a $2 million portfolio as on a $1 million one.
That structure has an obvious feature and a less obvious one. The obvious feature is alignment: the manager earns more when your portfolio grows. The less obvious one is that the fee is charged in bad years too, and that a rising balance raises the fee without requiring any additional work.
The size is easy to underestimate because it is quoted as a small percentage. At 1% on a $750,000 portfolio the fee is $7,500 a year, and over three decades of compounding it removes a substantial fraction of the final balance.
None of that makes advice worthless — behavioural coaching, tax work and estate planning have real value, and for many people a good adviser earns the fee. It does mean the fee should be compared against what it buys, and against the flat-fee alternatives that now exist for the planning and modelling part of the job.
Research on this
See also
- Fee drag — The cumulative reduction in a portfolio’s final value caused by annual fees, including the compounded growth those fees prevented.
- Expense ratio — The annual percentage a fund charges against assets to cover its own running costs, deducted from the fund’s value rather than billed to you.