Assets under management (AUM) fee

Also called advisory fee, percentage-of-assets fee

An annual fee a financial advisor charges as a percentage of the investments they manage for a client.

What it means

An AUM fee is the most common way investment advisors are paid. The advisor charges a set percentage of the client’s managed balance each year, often around 1% a year and frequently lower for larger balances, usually billed quarterly and deducted directly from the account. The fee typically covers portfolio management and may include financial planning, depending on the firm.

Because the fee rises and falls with the account, the advisor shares in the client’s gains, but the cost grows as savings grow even if the work does not. AUM fees are charged on top of the expense ratios of the funds held, so the total cost of investing is the two combined. Alternatives include flat annual fees, hourly planning and subscription arrangements.

Formula

Annual fee = Managed balance × Fee rate

Managed balance = value of the assets the advisor manages
Fee rate = annual percentage as a decimal (1% = 0.01)

Example

For example, a 1% fee on a $500,000 portfolio costs about $5,000 a year. Over time it compounds: as an illustration, $100,000 earning 6% a year grows to about $574,000 in 30 years, but with a 1% fee reducing the return to 5%, it grows to about $432,000, a gap of roughly $142,000.

How it’s used

Hiring an advisor to manage investments
Comparing advisor pricing models
Estimating the long-term cost of professional management

Strengths and weaknesses

Strengths

Aligns the advisor’s pay with account growth
Simple, predictable pricing that is easy to compare
Often includes ongoing management and rebalancing

Weaknesses

Costs rise as balances grow, even if services stay the same
Compounds into a large drag over decades
Added on top of fund expense ratios
May discourage advice to pay off debt or buy a home with managed assets

Good to know

Ask for the all-in cost, including fund expenses, in both percentage and dollar terms.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.