Understanding Financial Advisor Fees: A Guide to AUM, Commissions, and More
Why Financial Advisor Fees Vary
With the rise of robo-advisors putting downward pressure on advisory fees, investors may notice a wide range of pricing between firms. While some differences are justified, others might not be. The key is asking the right questions to understand what you're paying for and why.
From solo advisors to full economic teams, the financial advisory space is diverse. As with most things, you often get what you pay for—but understanding fee structures is essential.
Common Types of Financial Advisor Fees
Advisors can charge fees in various ways, sometimes using multiple methods in combination:
Assets Under Management (AUM) Fees
Commission-Based Fees
Hourly Rates
Flat Fees
Other fees may include trade execution costs, managed account fees, or blended rates based on account size. Let’s break these down.
Assets Under Management (AUM) Fees
AUM fees are popular because they align the advisor’s success with the client’s account growth. Typically, the more your portfolio grows, the more your advisor earns. However, this model isn’t perfect:
Advisors might avoid suggesting withdrawals even if it's in your best interest (e.g., to pay off debt).
Some advisors might become complacent, offering minimal engagement post-onboarding.
The solution? Work with an advisor you trust and who communicates well.
Commission-Based Fees
Commission structures can be problematic. Since advisors earn per transaction, they’re incentivized to recommend frequent trading—often to the client’s detriment. This practice, known as “churning,” can erode long-term returns.
Investors should be cautious with commission-based advisors and ensure recommendations are truly in their best interest.
Hourly Rates & Flat Fees
Some clients prefer paying advisors by the hour or through a flat fee for specific services. While this can work for passive investors managing index funds, it assumes life remains static. Major life changes often require ongoing advisory support.
Studies show that working with a trusted advisor can yield approximately 3% higher annual returns—translating to a 36% to 212% increase in wealth over a lifetime.
Additional Non-Advisor Fees
Advisors aren’t always the source of all fees. Be aware of:
Trade execution fees.
Mutual fund and ETF expense ratios.
Administrative fees for money transfers or account maintenance.
These fees can add up, especially if they’re not disclosed clearly.
How Fees Are Presented: Blended Rates Explained
Fee structures can be confusing. For AUM fees, higher asset amounts often result in lower percentage rates. However, this is where blended rates come into play.
For example:
First $100,000 charged at 1%
Next $100,000 charged at 0.9%
Crossing into a new tier doesn’t reduce the fee on your entire balance. Instead, it applies only to that tier, resulting in a blended overall rate. Understanding this can prevent surprises.
Choosing an Advisor: Fees vs. Value
While fees are important, they’re only part of the equation. An advisor’s communication style, responsiveness, and trustworthiness can be even more critical.
A lower fee isn’t a bargain if it comes with poor service or stressful interactions. Consider the long-term relationship and the confidence you’ll have during market volatility.