A financial advisor’s asset-based fee is a payment structure where the advisor charges a percentage of the client’s assets under management. This type of fee is typically calculated annually and can range from 0.5% to 2%, depending on the advisor and the level of service offered. Asset-based fees align the advisor’s compensation with the growth of the client’s portfolio, which can create an incentive for the advisor to prioritize investment performance. Unlike commission-based models, asset-based fees provide more predictable costs and remove potential conflicts of interest tied to individual transactions, as the fee is based on the overall value of managed assets rather than the buying or selling of specific investments.
Need help selecting and managing your investments? Consider working with a financial advisor.
What Is an Asset-Based Fee?
An asset-based fee is a percentage fee that’s based on your assets under management, or AUM. Unlike flat fees or hourly rates, an asset-based fee grows or shrinks in direct proportion to the value of the managed assets. This structure means that if a client’s investments perform well and increase in value, the advisor’s fee also increases, and if the investments lose value, the fee decreases accordingly.
A few factors can influence this figure, including the level of experience your advisor has, the firm they work for and if they receive any commissions.
Asset-based fees often decrease as your assets increase. In many cases, advisors have a graduated scale with benchmarks where the percentage changes. John O’Rourke, vice president of Private Banking and Wealth Advisor at First American Bank, says that the industry standard on accounts of $1,00,000 “falls within the 1% range and gradually declines as the size of the AUM increases.”
According to AdvisoryHQ, the average AUM fee in 2023 ranged from 0.59% to 1.18%, while the average fee for a $1 million balance was 1.02%. So, a client with a $1 million account would pay approximately $10,200 per year.
O’Rourke says the First American Bank fee schedule starts at 1% up to $3 million in AUM and eventually drops to 0.5% for balances that exceed $10 million.
Asset-Base Fees vs. Commissions
Additionally, the asset-based fee structure can offer a level of transparency to clients. Unlike commission-based models, where compensation might vary based on product sales, the asset-based model allows clients to see a clear, consistent percentage fee, aligning the advisor’s interests more closely with the client’s financial success.
However, it’s always important for clients to carefully understand what services are covered under the asset-based fee, as some advisors may charge additional fees for certain specialized services or expenses.
How Common Are Asset-Based Fees?
Asset-based fees are a widely used compensation model among financial advisors, especially in the United States. Many advisory firms prefer this model because it aligns their interests with those of their clients, which can help build trust and long-term relationships.
According to industry surveys, asset-based fees are the dominant structure for registered investment advisors (RIAs), with a significant portion of advisors charging this way. For instance, a Kitces survey of nearly 800 financial planners found that 89% of respondents charged an asset-based fee and 82% saw more than half of their revenue coming from this form of compensation.
This type of fee is especially common among advisors managing high-net-worth or ultra-high-net-worth clients, where the assets under management are substantial enough to justify a percentage-based fee. It is also frequently found in wealth management firms, robo-advisors, and hybrid advisory models. The prevalence of asset-based fees reflects their appeal as a transparent, straightforward way to compensate advisors while prioritizing the growth of the client’s portfolio.
Tiered vs. Flat Fee Schedules
As O’Rourke explained above, some advisors with an asset-based fee use a graduated or tiered schedule to calculate the fee that a client pays.
A tiered AUM fee schedule charges different percentages based on asset levels. For example, the fee rate might decrease as the total assets under management increase, offering clients a lower rate for higher asset tiers. This structure can provide more favorable pricing for those with substantial portfolios.
The same Kitces survey found that 59% of advisors with an AUM use a graduated fee structure, with the typical fee schedule comprising four tiers:
| Asset Range | Asset-Based Fee |
|---|---|
| First $1 million | 1.00% of AUM |
| Next $1 million | 0.85% of AUM |
| Next $3 million | 0.70% of AUM |
| $5 million and up | 0.45% of AUM |
In contrast, a flat fee schedule applies a single, consistent percentage to all assets, regardless of the total amount under management. According to the same Kitces study, 37% of advisors stick to a flat AUM fee structure. This type of schedule is simpler and more predictable but may not offer the same cost advantages for clients with larger asset bases.
Other Types of Advisors and Fees
One percent of your assets might not sound like a lot when you don’t have a lot. Yet the more money you have, the more money you’ll owe your financial advisor. Perhaps that’s why some advisors require you have a minimum asset value before working with you. An advisor may also charge flat fees or hourly rates for certain services. This could be instead of or in addition to an asset-based fee. You may even choose to offer your advisor performance-based fees if they achieve certain returns.
Since fee types and amounts vary so widely, it’s best to shop around and compare your options. There are plenty of brokerages, banks and firms to choose from. And human financial advisors are not your only option. You may want to look into robo-advisors, or automated online investing platforms. Some charge as low as 0.25% of AUM.
If you don’t have the financial means to secure a financial advisor, a robo-advisor with a hands-off approach could be a good solution. Plus, some robo-advisor deals include conversations with a financial advisor for an extra charge. There’s no standard in place and changes based on the company. You can expect to pay anywhere from $100 to $400 an hour depending on your needs and what you’re looking for.
How to Minimize Advisor Fees
Due to their costs, hiring a financial advisor isn’t possible for everyone. There are ways you can cut back when it comes to advisor and firm fees, though.
- Ask upfront: Before you get started with any financial advisor, ask about their fee structure. How much do they charge? Is it a flat fee or a percentage of assets under management? Are they fee-based or fee-only advisors? If they’re fee-based, ask where their commission earnings come from.
- Choose your investments wisely: When you invest in certain securities, like mutual funds and exchange-traded funds, you could incur additional fees. They may seem small at first, but they add up over time. Clarify with your financial advisor whether these fees pass on to you. Better yet, inquire about less expensive investment options that fit your risk tolerance and can help you reach your goals.
- Negotiate: Advisors aren’t one-size-fits-all. Not all of them are the right fit for you or your investment strategy. And since you’re always allowed to change investment firms and financial advisors if you believe you can find a better rate somewhere else, don’t be afraid to ask for a better deal.
Bottom Line
Asset-based fees offer a straightforward way for clients to compensate their financial advisors while aligning interests toward portfolio growth. Whether the fee is calculated using a graduated or fixed schedule, asset-based fees offer a transparent and structured way to pay for investment advice. Understanding how these fees work, along with their advantages and potential drawbacks, can help clients make informed decisions when selecting financial advisory services.
Investment Tips
- Financial advisors can help you evaluate investments and build a portfolio that’s aligned with you financial goals and risk tolerance. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As your consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
- Before you seek an advisor for investment help, determine how much money you’ll need for retirement. Our retirement calculator can help you see where you stand based on your age, location, monthly savings and estimated retirement expenses.
Photo credit: ©iStock.com/skynesher, ©iStock.com/lovelyday12, ©iStock.com/Indysystem