Understanding Assets Under Management Fees: Pros, Cons, and How They Work

Assets under management (AUM) fees are charges that depend on the assets an advisor manages on your behalf. If you're considering working with a financial advisor, it's important to understand how AUM fees work, the pros and cons, and what you can expect to pay.

What Is an AUM Fee?

An AUM fee is a fee that financial advisors charge based on a percentage of the total value of the assets they manage for you. It's a common fee structure in the financial advisory industry and is often used by registered investment advisors (RIAs).

When you invest your money with a financial advisor, your investable assets are under the management of your chosen advisor. This is known as "Assets Under Management", or AUM for short. The AUM fee is typically calculated as a percentage of your total assets and is charged on an annual basis.

How AUM Fees Work

AUM fees are calculated as a percentage of your total investable assets. The exact percentage can vary depending on the advisor and the amount of assets being managed. Generally, the larger your investment portfolio, the lower the percentage fee.

For example, if you have $500,000 in investable assets and your financial advisor charges a 1% AUM fee, you would pay $5,000 in fees annually. If your portfolio grows to $1 million, your annual fee would increase to $10,000.

Pros and Cons of AUM Fees

Like any fee structure, AUM fees have their advantages and disadvantages. Let's take a closer look at the pros and cons:

Pros of AUM Fees:

• Alignment of Interests: AUM fees align the interests of the advisor and the client. As your assets grow, the advisor's fee also increases, giving them an incentive to help your portfolio perform well.
• Easy to Understand: AUM fees are relatively straightforward and easy to understand. You know exactly how much you'll be paying based on the percentage agreed upon.
• Flexibility: AUM fees can be flexible, especially when compared to other fee structures. Some advisors may offer tiered fee structures or fee breakpoints based on the size of your portfolio.

Cons of AUM Fees:

• Potential Conflicts of Interest: While AUM fees align the interests of the advisor and the client, there can still be potential conflicts of interest. Advisors may have an incentive to encourage clients to keep more money invested with them, even if it's not in the client's best interest.
• Higher Costs for Larger Portfolios: AUM fees can become more expensive as your investment portfolio grows. If you have a substantial amount of assets, the fees can eat into your overall investment returns.
• Lack of Customization: AUM fees are based on the total value of your assets, which means you may be paying the same fee regardless of the services you actually use or the complexity of your financial situation.

How to Minimize Advisor Fees

If you're concerned about the cost of AUM fees or want to minimize your advisor fees in general, here are a few strategies to consider:

• Shop Around: Don't settle for the first advisor you come across. Shop around and compare fees and services offered by different advisors to ensure you're getting the best value.
• Consider Fee-Only Advisors: Fee-only advisors are compensated solely by the fees they charge and do not earn commissions from product sales. This fee structure can provide more transparency and potentially lower fees.
• Negotiate: Don't be afraid to negotiate with your advisor. If you have a substantial amount of assets or are a long-term client, you may be able to negotiate a lower fee or more favorable fee structure.
• Be Proactive: Stay involved in the management of your investments and regularly review your portfolio. By being proactive, you can potentially avoid unnecessary fees and make more informed decisions.

The Bottom Line

Assets under management (AUM) fees are a common fee structure in the financial advisory industry. They can provide alignment of interests between the advisor and the client, but they also come with potential conflicts of interest and higher costs for larger portfolios. It's important to carefully consider the pros and cons of AUM fees and explore strategies to minimize your advisor fees if necessary.

Remember, the fee structure you choose should align with your financial goals, risk tolerance, and overall investment strategy. By understanding how AUM fees work and taking a proactive approach to managing your investments, you can make more informed decisions and potentially optimize your investment returns.