Over time, I’ve found myself defending positions that perhaps don’t really need defending. Take stock investments, real estate, financial advisors, or index funds, for example. This post fits into that category rather well.
I lean toward being critical of AUM (Assets Under Management) fees, but the backlash against them can sometimes get a bit extreme. It’s kind of surprising how people react.
### AUM Fee Critique
Let me be clear: I’m not here to defend the average financial advisor. Many of these “advisors” operate more like salespeople, offering questionable advice in exchange for commissions. It’s easy to see why someone, even if they start out well-intentioned, could stray off course. Bad advice can be really costly, and it’s hard to find good advice at a reasonable price.
Some advisors who do offer solid advice still charge a lot. For example, managing $300,000 with a 1% fee might seem fair, but that doesn’t make sense for someone managing $30 million. The disparity is noticeable, and a capable advisor might charge between $5,000 to $15,000 annually for good service.
### Understanding AUM Fees
Some people seem unaware that AUM fees are, in fact, still fees. They might say they’re looking for a fee-only advisor, but often don’t realize the nuances of “fee-based” options; these still involve multiple fees. An advisor can charge a flat fee, an hourly rate, or an AUM fee, and it’s crucial to understand that any of these structures can end up costing you.
### The “Advice-Only” Model
Then there’s the push for an “advice-only” model where clients pay just to get advice. This could work for a specific type of investor, what I call a “validator.” These people may not be confident in making decisions but can follow directions if someone lays it out for them. You might wonder why advice-only models are rare—well, they tend to be transactional and don’t foster long-term relationships, which can affect client satisfaction.
Moreover, there are many clients who want to delegate but don’t realize they fall into a different category. They might delay action for months, leaving financial decisions unmade. This situation is tricky for both the advisor and the client.
### The Math Behind AUM Fees
One significant issue is the discomfort with basic math that some clients display. Calculating your AUM fee is pretty straightforward—you simply multiply your assets by the fee percentage. If, let’s say, your assets are $700,000 and the fee is 0.9%, you’d be looking at a $6,300 fee for that year.
That might seem fair at first glance, but consider this: if you have $3 million, your advisor could be charging quite a lot, perhaps $27,000 a year for what could be done for as low as $12,000 with another advisor. If you’re unwilling to negotiate or explore options, you might be missing out.
### Why High Fees Persist
So why do advisors charge such staggering AUM fees? It boils down to one simple fact: clients pay them. It’s just good business. When you’re in a position to charge what clients are willing to spend, it creates a stable revenue stream. This model can be quite lucrative over time, especially when advisors keep building their practices.
As they grow, many clients remain loyal, preferring to avoid the hassle of reassessing their finances. A well-established advisor can enjoy a comfortable income after years of hard work, so it’s understandable they don’t want to change their approach.
### The AUM Fee Defense
Before diving deeper, I should clarify the reasonableness of AUM fees. Many of us already pay them, albeit under different names. Investing in a fund might involve a very low fee, maybe 0.03%, which is definitely a form of an AUM fee.
The issue isn’t really the fee itself but rather how unreasonable it can become. Some advisors might bill much higher percentages, which can be an issue. Not everyone is aware, but many DIY investors might support lower AUM fees while still dealing with advisors who charge them.
### Complexity in Management
Flat fees can work well across different asset levels—charging $10,000 a year for $400,000 is similar to charging for $3 million. But managing $30 million is a different ball game, with increased complexity and risk. As clients’ portfolios grow, they have different considerations like estate planning or tax issues, requiring more detailed attention.
But how much should that increased complexity cost? It can vary. For example, some advisors might not raise their fees as client portfolios grow, while others might start charging significantly more.
### Conclusion on AUM Fees
So here are a few takeaways from all this:
– Advisors charging AUM fees are effectively still fee-only.
– The AUM model isn’t inherently unjust but can be exploited.
– It’s reasonable to ask for a fair fee based on the services provided, but doing your math is essential.
– Not all clients fit into the DIY model; many need genuine advice.
What do you think? Why does the AUM model garner such mixed feelings? If you have an advisor, do you find the AUM fee justifiable?
