When does a 1% AUM fee become just too much?
A fallacy that has been spread by the financial services industry for many decades is the idea that collecting a 1% AUM (Assets Under Management) fee provides incentive to achieve high performance (aka “If I win, you win” or “If I lose, you lose”). This concept allows advisors to charge a fee that, once over a certain AUM threshold, can be rather egregious and continue to provide enormous profit margins. At IMPACTfolio, we’ve determined that the threshold is $750,000. Under this amount, a 1% AUM fee can still make sense when you break it down to an hourly cost. However, over $750,000, it becomes more difficult to justify a 1% fee in terms of hourly costs.
Is performance really worth 1%?
In our collective experience, we have found the opposite of the “If I win, you win” fallacy to be true. In order to justify the value provided in a 1% AUM fee structure, an advisor will often feel the pressure to actively manage a portfolio to the detriment of long term rates of return. The goal is simply to make it appear as though the advisor can outperform a given benchmark, thus justifying the 1% AUM fee charged. Although this active management may help alleviate major downturns, it often creates lower-than-average long term rates of return. An advisor cannot control the stock markets, but an advisor can control fees. If the incentive truly is to achieve high performance, wouldn’t an advisor lower his/her fees in order to provide the highest net rate of return possible?
Why is a flat fee better?
Under a flat fee structure, IMPACTfolio has the same incentive as other firms to achieve high rates of return. The goal is also to attract and retain clients. However, the difference is that we let our clients keep more in their pockets by charging less than the typical advisor. Also, our clients know that we are sitting on the same side of the table as them because any conflict of interest to gather and retain assets is removed. We do not have the pressure to “gather, gather, gather” assets under management. Because we are paid the same fee regardless, our clients know that our advice is truly objective. When the opportunity arises to invest in a real estate property, a business, a pension annuity payout, or assisting a family member, we discuss all the pros and cons with our clients from an objective standpoint.
How can we keep our fees low?
We keep our fees low by keeping our overhead expenses low. In addition, we have cut out the “middle men”. We are independent and do not have any big bank, insurance company, brokerage firm, or top-level executives to pay first.
If you are tired of paying your financial advisor $10,000, $20,000, or $30,000+ a year in management fees, call IMPACTFolio® at 844-218-3800 to discuss how a flat fee could help you keep more of your hard-earned money.