Is a Financial Advisor Who Charges an Asset-Based Fee Right for You?
If you’ve been researching the cost of financial advisors online, it’s likely you’ve seen several articles talking about financial advisors who charge you a fee based on the percentage of assets they manage on your behalf.This is the most common way traditional financial advisors charge for their services today. This pricing model is known as the “assets under management “ or “AUM” fee model.The current industry standard is to charge anywhere from 0.50% – 2% of the assets being managed on an annual basis. Most advisors will fall somewhere around the 1% fee mark and will often charge a discounted rate above certain tiers or asset thresholds.
This means if you deposit $500,000 with a financial advisor, at a 1% fee, they will charge you $5,000 annually to handle your investments. Or, if they charge 1% on the first $250,000 of your assets they manage and .75% for assets above $250,000, your annual cost for a $500,000 portfolio would be $4,375 ($2,500 + $1,875).While the price you pay to a financial advisor under the AUM fee model is calculated based upon the assets they manage for you, you will likely receive additional services such as the development of a financial plan for no additional cost.This model is a generally accepted industry standard, especially for those investing for retirement. This fee pays the advisor to invest your money for you based on your risk tolerance, goals, timelines and other factors of your financial plan.Finding a full-service advisor who will manage your funds for 1% or less is generally considered attractive, while paying significantly more may cost you a large portion of your potential returns over time.