What does a $3 million portfolio pay in advisory fees over 10 years?
Under the assumptions below, ten years of advisory fees on a $3 million portfolio ranged from about $190,000 to $395,000. The calculation method drove most of that range, more than the starting rate did. At the same growth rate, the same portfolio paid 1.5 to 2.1 times as much under a 1.00% AUM fee as under a fixed annual fee.
We ran the numbers because most fee comparisons stop at year one, and year one is where the difference is smallest.
The assumptions
- Starting value: $3,000,000, with no contributions or withdrawals.
- Fees are paid from the portfolio at the end of each year. That money no longer compounds, so the cost includes lost growth.
- AUM fees are 1.00% and 0.75% of the beginning-of-year balance, recalculated every year. Many AUM schedules are tiered, so a household's blended rate at $3 million often falls somewhere in this range.
- Fixed fee follows WealthEQ's published Personal CFO schedule. $3 million falls in the 0.80% breakpoint, for a $24,000 starting fee. The 0.10% wealth-plan reduction begins on the plan's one-year anniversary; we assume the plan is delivered at the start of the relationship, so the reduction applies from year two. After five years invested, a further 0.20% reduction applies. Beginning in year six, the fee adjusts each year by the actual change in CPI over the prior year. For this illustration we assume 3% CPI, a hypothetical figure.
- Growth rates of 0%, 4%, and 7% a year are hypothetical and chosen to show sensitivity. They are not forecasts.
Year by year: where the gap opens up
At 4% hypothetical annual growth, the fixed fee starts higher than a 0.75% AUM fee. It falls below it in year two and never crosses back.
| Year | Fixed annual fee | AUM fee at 1.00% | AUM fee at 0.75% |
|---|---|---|---|
| 1 | $24,000 | $30,000 | $22,500 |
| 2 | $21,000 | $30,900 | $23,231 |
| 3 | $21,000 | $31,827 | $23,986 |
| 4 | $21,000 | $32,782 | $24,766 |
| 5 | $21,000 | $33,765 | $25,571 |
| 6 | $15,450 | $34,778 | $26,402 |
| 7 | $15,914 | $35,822 | $27,260 |
| 8 | $16,391 | $36,896 | $28,146 |
| 9 | $16,883 | $38,003 | $29,060 |
| 10 | $17,389 | $39,143 | $30,005 |
| 10-year total | $190,026 | $343,916 | $260,927 |
Hypothetical illustration. 4% assumed annual growth, fees deducted at year end, no contributions or withdrawals. Not a projection of any account's results.
Notice what the AUM columns do. Both rise every year, though nothing about the relationship has changed. The portfolio grew, so the fee grew. By year ten, the 1.00% fee is 30% higher than it was in year one. The fixed fee is about 28% lower than it was in year one, even after five years of assumed 3% CPI adjustments.
How do the results change with market returns?
The AUM fee rises with returns and the fixed fee does not, so the gap widens as returns rise. At 0% growth, the gap is mostly the difference in rates.
| Assumed annual growth | Fixed fee (both reductions) | Fixed fee (no reductions) | AUM fee at 0.75% | AUM fee at 1.00% |
|---|---|---|---|---|
| 0% | $190,026 | $251,242 | $217,556 | $286,854 |
| 4% | $190,026 | $251,242 | $260,927 | $343,916 |
| 7% | $190,026 | $251,242 | $300,073 | $395,424 |
Ten-year cumulative fees on a hypothetical $3,000,000 portfolio. The fixed-fee columns do not change with growth because the fee is not tied to the balance.
Two observations from this table:
- The fixed-fee totals are identical in every row. That is the definition of the model, and it is why the total is predictable before the relationship begins.
- The reductions matter. Without them, the fixed fee totals about $251,000. That still beats a 1.00% AUM fee in every scenario. Against a 0.75% AUM fee, it is about $10,000 cheaper at 4% growth, about $49,000 cheaper at 7%, and about $34,000 more expensive in a flat market. We built the reductions into the schedule deliberately. They reward the two behaviors we consider most important to long-term outcomes: having a plan and staying invested.
When does an AUM fee cost less?
An AUM fee can cost less in two situations, and you should know both before choosing.
When the AUM rate is low and markets are flat. If your current advisor charges 0.75% or less and the portfolio goes nowhere, the AUM fee can come out ahead. In our flat-market scenario, a 0.75% AUM fee ($217,556) beat the fixed fee without reductions ($251,242).
After a large decline. An AUM fee falls with the portfolio. A fixed fee does not. If our hypothetical portfolio dropped 25% in year one, a 0.75% AUM fee would fall to roughly $16,700 in year two. The fixed fee would stay at $21,000. In a down market, the AUM client pays less and the fixed-fee client pays the same.
We think the trade is worth it. Market declines are temporary for a long-term investor, while the upward ratchet of an AUM fee is permanent. But it is a real trade, and a firm that describes a fixed fee as cheaper in every scenario is not giving you the whole picture.
Why the calculation method matters more than the rate
An AUM fee charges again, every period, against whatever the balance has become. Over long horizons, that has two effects that do not show up in a year-one quote.
The fee compounds with your returns. A 1.00% fee on a portfolio that doubles becomes a fee that doubles. The scope of the work, the hours, and the complexity may not have changed at all.
It creates a quiet conflict. Under an AUM fee, every decision that reduces the balance permanently reduces the advisor's revenue. That includes paying off a mortgage, funding a business, buying real estate, and making a large gift to children or charity. A good advisor recommends those moves anyway when they are right. A fee set once removes the conflict from the conversation.
What still moves a fixed fee
A fixed fee is not a frozen fee, and you should ask exactly what moves it. Under our schedule:
- Material additions or withdrawals of more than 10% of the fee base over a rolling twelve months reset the fee base. Routine saving and retirement distributions do not.
- Inflation adjustments begin in year six for Personal CFO relationships, using the actual change in CPI. If CPI rose 3% in year five, the fee rises 3% at the start of year six.
- Market movements never change the fee, in either direction.
The full mechanics, including a worked example of adding $10 million in year six, are on our fee schedule.
The three questions to ask any advisor
The labels "flat fee," "fixed fee," and "fee-only" are used loosely across the industry. Three questions cut through them:
- Do you receive compensation from anyone other than me? This tells you whether the advisor is fee-only.
- What is my fee in dollars at my account size? This tells you how the fee is calculated.
- If my portfolio doubles and nothing else changes, what do I pay? This tells you whether the fee reprices. It is the question almost no one asks, and it is where most of the ten-year difference comes from.
Every registered advisor's answers are in its Form ADV Part 2A. Ours is here.