Registered Investment Advisor Fees

Understanding Different Wealth Management Fee Structures

Flat Investment Management Fees

Under a flat fee schedule, the calculation of fees is straightforward. On the measurement date, the category your account belongs to is determined, and a single percentage is charged on all assets in the fund and paid to the advisor. Here’s an example of a flat fee schedule based on your assets:

Less than $2 million = 1.50%
From $2,000,001 to $5 million = 1.25%
From $5,000,001 to $10 million = 1.125%
From $10,000,001 to $25 million = 1.00%
More than $25 million = negotiable

Note: Advisors who work on a fee-only basis may be in a better position to provide unbiased advice since they do not profit directly from the products you choose. Depending on their fee structure, they may earn more if your investments perform well, but not when you buy or sell a specific product or investment.

Tiered Investment Management Fees

With a tiered fee schedule, different fees are charged at different asset levels. This way, everyone, regardless of account size, pays the same percentage at the same deposit level, which gives a sense of fairness to all clients. Here’s an example of a tiered fee schedule:

First $250,000 = 1.75%
Next $750,000 = 1.50%
Next $4 million = 1.25%
Next $5 million = 1.00%
Next $15 million = 0.75%
Amounts over $25 million = 0.50%

Imagine an investor coming in with $50 million in assets they want to manage. Using the fee schedule above, the tiered fee calculations would be as follows:

$250,000 × 1.75% = $4,375
$750,000 × 1.50% = $11,250
$4 million × 1.25% = $50,000
$5 million × 1.00% = $50,000
$15 million × 0.75% = $112,500
$25 million × 0.50% = $125,000

Total fees = $353,125, or 0.70625% per year. However, fees are paid quarterly, so it would be estimated at $88,281.25, or less than 0.18%, recalculated every three months to reflect changes in market value. For example, if the market drops, absolute fees also drop, and vice versa.

Estimated Investment Management Fees by Asset Class

Another fee system estimates fees based on asset classes. Sometimes this means the client pays lower or no fees on cash reserves held within the client’s portfolio. This approach is often preferred by value investors who spend years sitting on large cash reserves just to quickly deploy them when something crosses their path.

A sample fee schedule for invested balances might look like this:

1.50% on equity investments
0.75% on fixed-income investments (like bonds)
0.00% on cash

These fees apply regardless of the amount of assets. It doesn’t matter if you have $5 million or $100 million. Imagine an investor with $25 million, with 15% of their portfolio in cash, 25% in bonds, and 60% in equities.

$15,000,000 in equities × 1.50% = $225,000
$6,250,000 in fixed income × 0.75% = $46,875
$3,750,000 held in cash reserves × 0.00% = $0

Total fees = $271,875, or 1.0875%.

The advantage for the client is that during buildup periods or after large deposits, they don’t pay much, if anything, on their cash. If the account has a proportion like 30% or 50% in cash while the manager looks for smart things to do, the effective fees may be much lower than they would normally pay, which is balanced by higher fees later.

Fees

Hourly Investment Management

Some registered investment advisors charge hourly fees for certain services, many of which are pre-packaged for convenience. For example, if you are not going to manage your assets by the firm, you may still want them to take a look at your investments and review your current plan. They might charge $250 or $500 per hour with a basic package starting from three or five hours.

Fixed Fees Combined with Annual Management Fees

In other cases, you may end up paying a combination of fees that require you to do some math to determine what you are paying annually as a percentage of assets. For example, if you opened a trust worth $500,000, you might pay a basic annual fee of $4,500 + one-time or shared fees of $2,500 + fees on the mutual funds that the advisor helps you select (ranging from 0.05% to less than 1.00% depending on the details).

By the time everything is completed, you are really paying, both directly and indirectly, around $7,850 if you choose a good mix of domestic and international funds. It is an effective annual fee of 1.57% on assets, which is quite a good deal if the trust fund has straightforward instructions and does not require holding specific operational assets like real estate investments.

Stacked Fees

If you are working directly with an asset management company, you may only pay their fees. However, many wealth management firms and financial planners charge fees and then place you in mutual funds from third parties or other exchange-traded funds that also charge management fees.

For example, it may be more tax-efficient to pay an annual management fee of 1.25% directly to an asset management company in a separately managed account rather than choosing a wealth management firm that advertises an annual fee of 0.75% but places you in funds and exchange-traded funds that charge a management fee of 0.50%, which you would only see if you read the fine print. You’ll receive better service and have more control with a separately managed account.

Source: https://www.thebalancemoney.com/registered-investment-advisor-fees-357218