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What Fees Can I Expect From a Financial Professional

Firms charge for financial services in a variety of ways. It is important to understand the different types of fees associated with Financial Planning and Investment Management. The Form ADV requests that investment advisors provide every type of fee that they may charge a client.


Percentage of assets under management (AUM)

This is the most common fee structure for portfolio management services. Fiduciary advisors will use this fee structure as it most closely aligns advisor compensation to client portfolio performance.


The most common form of percentage of AUM fees is a flat rate that a client pays for every dollar the advisor manages. An example would be a client with a portfolio of $1,000,000 in investable assets agrees to work with a new financial advisor. The financial advisor’s rate is 1% of AUM. This means that the yearly amount the client would pay the financial advisor is $10,000. ($1,000,000 investment * 1% = $10,000). In this fee structure, the financial advisor is incentivised to help you earn money and protect from downside as they get a pay increase when your portfolio performs well, and a pay decrease when your portfolio performs poorly. If in the client’s second year with the financial advisor their portfolio is now up to $1,200,000, the yearly advisory fee is now $12,000. Likewise if the portfolio drops to $800,000, the advisory fee will decrease to $8,000. This may seem like a large amount of money to pay for portfolio management services, however the expectation is that the general return the advisor will generate on your assets over a long time frame greatly exceeds the 1% fee. It is important to note that 1% is not industry standard, this fee may be more or less depending on firm protocol. It is important to ask a potential advisor upfront what the percentage fee will be if the advisor uses this fee structure.


Tiered Fee Schedule

Another common type of AUM fee is a tiered fee schedule. This assumes that if you have at least a specific amount of money invested, you will receive a decrease in percentage fees for reaching certain breakpoints. These work similarly to tax brackets in the United States. An example is as follows:

  • - $0 - $100,000: 1.5%
  • - $100,001 - $500,000: 1.25%
  • - $500,001 - $1,000,000: 1.00%
  • - $1,000,001 - $5,000,000: 0.75%
  • - $5,000,001+: 0.5%

Let's take this tiered fee example with a large portfolio of $10,000,000 in investable assets and determine the fee:

  • $100,000*1.5% = $1,500
  • $500,000*1.25% = $6,250
  • $1,000,000*1.00% = $10,000
  • $5,000,000*0.75% = $37,500
  • $3,400,000(the remaining amount of assets over the $5m mark)*0.5% = $17,000
  • Total fee on $10,000,000 = $72,250 per year.

Note that a $10,000,000 portfolio being charged a flat 1.00% AUM fee would pay $100,000 per year. In this scenario, the tiered fee schedule saves the client money, but only because of the significant portfolio size. If an advisor uses a tiered fee schedule they will provide you the breakdown as shown above.


Percentage of AUM fees can be taken directly out of the account to cover the cost using the cash balance in the investment account. This means you will not receive a cash bill for the service. Generally advisors will take this fee out of the account quarterly and the fees will show up on firm statements. If we return to the 1% fee on a $1,000,000 portfolio, $2,500 will be taken from the selected investment account quarterly to cover the advisory fee.


Hourly Charge

An hourly charge is more simple to understand. The advisor will present you with their hourly rate for any work they have done to provide you a service. Generally portfolio management services are not charged hourly. But clients may request their advisor help them with special one time projects. If the advisors work on the project is not covered by an AUM fee, they will charge an hourly fee. Firms that charge an hourly rate usually only do so for one time projects, or for helping non advisory clients upon request. As listed above it is crucial to always ask questions relating to possible hourly fee charges before entering a relationship with an advisor.


Subscription Fees

Subscription fees are less common with financial advisors than other professional fields. If a firm produces market commentary or automated investing tools they may charge a subscription fee to access the software or service. This would be similar to paying for a streaming service to watch shows and movies, but the end value is to provide investment or financial information.


Fixed Fees

An advisor charging a fixed fee will charge a client a flat rate per year regardless of portfolio size or services provided. An example is a financial advisor charging $10,000 per year for all services including portfolio management, financial planning, and any special projects. If a client does not have a large portfolio and rarely speaks to their advisor about their financial situation a fixed fee may not be the correct option. The amount an advisor will charge on a fixed fee basis will be different for each client situation.


Commission

A commission is a rate, usually charged by a broker for client transactions. It is not commonly recommended to enlist a financial professional that is paid by commission. Commission trades are heavily regulated as the over-trading of a client account with the intent of charging a commission is illegal and will result in a firm violation and disciplinary action for the responsible broker or account representative.


Other

Any additional charges not listed above must be detailed in the Form ADV by the advisory firm. For more information on other fees, clients can view a firm's Form ADV on the SEC website or call the firm personally.