Fee Structure – Assets Under Management

The Assets Under Management (AUM) fee structure replaces the hourly or project based billing rates by charging a client a percentage of the funds directly held with the financial advisor.  At the end of each month, the fund custodian withdraws the fee from the client account.  Most firm AUM fees range from 1% – 3%.  The amount is determined by the complexity and size of the account, with most firms discounting the AUM fee as the account size grows.

Below is Phoenician Financial Planning’s AUM fee structure.

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How does this fee structure work?

The AUM fee structure is similar to paying a retainer on a lawyer.  A small amount of money is paid monthly to the advisor.  This allows a client to have full access to the advisor.  There are no hourly charges assessed and the initial project based fee, which covers the initial financial plan, is typically waived for clients based on the amount of assets brought to the firm.

The advice and guidance offered under the AUM fee structure is the most comprehensive available.  The client is paying for ongoing advice and guidance.  The benefit is that the advisor is able to control the investments they are managing for the client.  This ensures that the portfolios are properly diversified and rebalanced periodically.  The advisor can make changes to the portfolio as market conditions change.  Additionally, the advisor can ensure that the investments they are managing work with any outside investments, such as a client’s employer retirement plan.

Pros and Cons

Pros:

  • Provides complete, ongoing financial advice
  • Advisor pay is tied to account performance
  • A client does not need to be concerned about additional expenses when questions arise
  • Advice is proactive instead of reactive
  • Fees are not out of pocket

Cons:

  • AUM fees are not appropriate for small accounts
  • Costs reduce rate of return for client
  • Costs have the potential to be higher than other payment structures

Who should choose to use the Assets Under Management fee structure?

The most common reason people choose to pay the AUM fee is because they want to simplify their life.  The fee covers all aspects of the financial plan, including investment management.  This means that the client doesn’t have to spend time learning about investment products or following the markets.  The client doesn’t need to spend hours reviewing their accounts and periodically rebalancing investment portfolios.

Simplified life

While the tasks investment management and portfolio rebalancing can be taken on, a you need to weigh the value of doing it yourself against the cost of paying a professional.  As a business owner, I have to weigh the value of taking on the work myself at times.  If I have the time and competency to take on a project, it’s cheaper for me to do so.  If not, I’ll pass the work along to a professional.  Knowing when to do so saves me money in the long run.

Of course, simplifying your life and professional money management are not the only reasons to consider paying a percentage of your hard earned money to an advisor.  Another reason to choose the AUM payment structure is that your needs are more comprehensive than others.   A straightforward financial plan with periodic follow up might not be that expensive, but at a certain point, the cost of paying for hourly advice does begin to add up.

Large Portfolios

Typically, clients with larger amounts of assets to invest will require more of a time commitment. While that’s not always the case, many of these folks will require time intensive planning on tax, insurance, on estate issues.   Additionally, they tend to have far more accounts and alternative investments that are held outside of the advisor’s control, which leads to more time and focus on balancing out the portfolio the advisor controls.

Extensive Planning Needs

That being said, there are times where I would recommend clients with smaller investment accounts work under the AUM structure as well.  One current example is a client of mine who is starting their own business.  The household is younger, though the family income is high.  This means that most of the assets the client holds is through their employer plans.  Between the new business, changing employers, and other household events, it’s far more cost effective for this client to work with me under the AUM structure.

This client can reach out with financial questions or concerns at any time.  There is no need for them to worry about the cost each time they call me up or send me an email.  It’s far easier to work with a client that way.  An additional benefit from this is that clients are more likely to reach out early on if any financial issues arise.  Under the hourly plan, folks understand that they will be paying for the advisor’s time.  Most people hold off on reaching out for help until the issue becomes to great… a fact that only increases the amount of time their advisor needs to put into the problem.

Conclusion

We’ve covered the various ways you can pay for financial advice and guidance over the last few posts.  There is no right or wrong way to pay your advisor, though there are pros and cons of each method depending on your situation.  I offer a free consultation where we can discuss which option will work best for your situation.

Keep in mind, everyone wants to keep costs as low as possible nowadays.  There’s plenty of free advice out there.  Keep in mind, you always get what you pay for.  When you hire a financial advisor, you’re paying for their experience, education, and competency.  You’re paying them so you can focus your time and effort on what is most important to you.  The money you spend is an investment towards you future goals.