If you are a High Net Worth individual, a fixed flat-fee vs a percentage of Assets Under Management (AUM) for investment management can make a huge difference in your overall yearly fee. Shocking to some, if you are a Very High Net Worth individual, the investment fees can be to the tune of tens of thousands of dollars per year. How can you bring that fee total down and still receive professional investment management and advice for your portfolio? The answer may be in fixed flat-fee structure. But lots of questions need to be asked, and comparing advisors and firms may take some investigation.
A good first step is to check with your advisor to fully understand their firm’s fee schedule. Check their website. If their fees are posted, the transparency can make it easier to compare firms. If not posted online, you will need to ask for a detailed breakdown of their methodology (percent AUM, fixed flat-fee, or a hybrid).
If the fee structure is a percent AUM model, it’s important to understand the various tier levels and how assets may get prorated as your account balance may increase or decrease over time. It is also important to understand what value-add you will receive from the advisor, or firm, for the percent AUM you are paying. Do not hesitate to ask! For example, is a written comprehensive Financial Plan included in the percent AUM fee? Or will you just be receiving a quarterly statement?
If the fee structure if a fixed flat-fee, the same two questions above apply, but in a different context. Are there multiple tier levels of ‘fixed’ flat-fees? Or is there only one fixed flat-fee? Is comprehensive financial planning included in the flat fixed-fee? Are there different fixed flat-fees depending on the complexity of your portfolio and financial planning requirements?
There is the possibility of a hybrid AUM model in which a firm may charge a percent AUM for certain clients and a fixed flat-fee model for other clients. What is the determining factor for you, as a client, as to which model would fit best?
Fixed Flat Fee Example for a High Net Worth Individual
The industry-average investment management model is to charge a yearly rate of 1% of AUM. If you are a High Net Worth (HNW) individual with over $1 million in investable assets, you may be paying $10,000 per year. Clients that are very high net worth (VHNW) with over $2.5 million in investable assets are paying tens of thousands of dollars in investment management fees PER YEAR at the 1% AUM rate.
Some firms may help reduce those investment management costs by offering an alternative fixed flat-fee on accounts above a certain threshold of investable assets. If only certain model portfolios qualify for the fixed flat-fee, you need to know that. The table shows potential benefit from a fixed flat-fee schedule compared to the industry standard of 1% AUM. This example is using a fixed flat-fee with a cap rate of $6,000 per year.
If you would like to see how a fixed flat-fee investment management schedule can impact your retirement nest egg, we can help you with that analysis. A fixed flat-fee could save you hundreds of thousands of dollars over your retirement time horizon.
Example of Percent AUM
For a typical AUM client with $250 thousand of investable assets, the AUM fee equates to $2,500 per year. For this fee, many of these firms do not provide a full range of financial planning services. Generally speaking, when comparing percentage AUM or fixed investment management fees, the smaller amount of investable assets you have to manage, the more you’ll save with a percent AUM schedule rather than flat-fee schedule.
In both of the examples above, it’s important to find out if comprehensive financial planning is included in the fee. A 2020 national report shows that the median price of a comprehensive financial plan is $2,500. So, if your advisory firm isn’t providing that service, you may need to hire a 3rd party (such as a fiduciary) to put a written plan in place for you. That fee will be on top of the 1% AUM fee you are already paying!
Hybrid Model: Both Fixed Flat Fee and Percent AUM
Some firms offer both a Percent AUM and a Fixed Flat-Fee model. The reason for that is to provide the best of both worlds: A model that is in the best interest of the up-and-coming investor (investable assets less than $1 million) and also the lower-cost model for the HNW and VHNW investors. If you’re close to the $1 million mark, it might be wise to look for an advisory firm that has both models, so you can benefit both ways without switching firms.
Remember, individual investment fees can vary by firm, so it’s important to be knowledgable, compare, and ask a lot of questions.
Fixed Flat Fee – Related pages and articles
For an overview of industry compensation models, please see our article, Financial Advisor Compensation Models
Our Percent AUM and Fixed Flat-Fee schedule can be viewed here: Fee Schedule
For a definition of High Net Worth (HNW), Very High Net Worth (VHNW), and Ultra High Net Worth (UHNW), see this article on Investopedia: HNW terms
About Kastler Financial Planning
We are a fiduciary firm, providing fee-only, professional financial services with affordable and transparent fees. Our core purpose is to help improve your financial situation and to help you Get Retirement Ready. We do not sell financial products. We believe everyone should have access to financial advice without the pressure or bias of product sales or commissions. KastlerFinancialPlanning.com
We perform these services either as hourly, a one-time fee-only project, as on-going financial planning, or Assets Under Management (AUM), depending on your needs. Whether you live in our backyard or across the country, we aim for a pleasant client experience through our secure, all-digital Financial Planning Process.
Contact Us
If you have any question on how our services may apply to you, please contact us at the number below or submit an email through our Contact Us form.
© 2020 All Rights Reserved
Kastler Financial Planning | Ortonville, MI 48462
248-793-7314
