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When you pay a financial advisor a percentage of assets in your portfolio, you may think that’s your total cost. Oftentimes, this is only part of what you pay. Additional expenses can be built into your investments and reduce your returns over time. Overlooking those costs could leave you paying more than you had originally expected.
Identifying Additional Fees in Your Portfolio
An advisor who charges 1% of assets under management (AUM) generally bases the fee on the total value of your account. That percentage covers the advisor’s compensation, not the ongoing expenses of the investments held in the portfolio. Using an $800,000 portfolio as an example, here’s what a 1% AUM fee could look like:
| Category | Amount |
|---|---|
| Portfolio managed by the advisor | $800,000 |
| Annual advisory fee | 1% |
| Advisor fee | $800,000 × 1% = $8,000 per year |
You may initially focus on this $8,000 charge, but mutual funds and exchange-traded funds (ETFs) generally have expense ratios that cover management and operating costs. These expenses are paid from fund assets and are reflected in the fund’s performance instead of appearing as a separate bill. That can make them less visible than an advisory fee.
Assuming the funds in this portfolio carry a weighted average expense ratio of 0.50%, here’s how much that could add up to:
| Category | Amount |
|---|---|
| Amount invested in funds | $800,000 |
| Average fund expense ratio | 0.50% |
| Estimated fund expenses | $800,000 × 0.50% = $4,000 per year |
Adding the advisory fee and estimated fund expenses raises the sample portfolio’s total cost to:
| Category | Amount |
|---|---|
| Advisory fee | $8,000 |
| Underlying fund expenses | $4,000 |
| Combined annual cost | $8,000 + $4,000 = $12,000 |
| Combined cost as a percentage of the portfolio | $12,000 ÷ $800,000 = 1.50% |
The advisor’s stated 1% fee may accurately describe the charge for advisory services, but it does not include expenses associated with the investments themselves. Asking your financial advisor to explain the advisory fee, fund expenses and any other account charges can give you a more complete estimate of what you pay.
Where to Find What You Are Paying For
Your advisory agreement or your advisor’s Form ADV brochure will generally explain the advisory fee and describe other types of expenses that clients may pay, such as brokerage commissions, custodial charges or third-party manager fees. A mutual fund or ETF prospectus includes a standardized fee table showing the fund’s expense ratio and other applicable charges.
| Potential Cost | What It May Cover |
|---|---|
| Transaction or brokerage charges | Costs for buying and selling securities within the account |
| Wrap-account expenses | Certain charges that may not be included in the wrap fee |
| Third-party manager fees | Fees paid to outside managers overseeing part of the portfolio |
| Custodial or account-maintenance charges | Fees for holding and administering the account |
| Sales loads or 12b-1 distribution fees | Charges associated with the sale, distribution or marketing of certain funds |
What Counts as a Reasonable Fee?
There is no single advisory fee that is reasonable for every investor. A fee may be more or less appropriate depending on the scope of services provided, the complexity of your financial needs, the amount invested and the advisor’s pricing model. Comprehensive financial planning and ongoing portfolio management may reasonably cost more than a one-time consultation or investment management alone.
For example, if you’re paying 1.5% on an $800,000 portfolio ($12,000 a year) whether that amount is appropriate depends on what is included in the relationship. Services may include tax planning, retirement planning, ongoing portfolio management or a more limited level of advice.
The total cost also matters. Comparing the advisory fee and underlying investment expenses with the services you receive can help you evaluate whether the overall cost fits your needs. A financial advisor can explain how each charge is calculated and what it covers, helping you assess whether the total lines up with your financial goals.
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