Learn more about how different investment fee schedules work and how wealth management fees are calculated.
Flat Investment Management Fees
Under a flat fee schedule, fee calculation is simple. On the measurement date, whichever asset band your account relationship falls into is what you pay. All assets in the fund are charged a single rate payable to the advisor. Here’s an example of a flat fee schedule based on your assets:
Less than $2 million = 1.50%$2,000,001 to $5 million = 1.25%$5,000,001 to $10 million = 1.125%$10,000,001 to $25 million = 1.00%More than $25 million = negotiable
Tiered Investment Management Fees
With a tiered fee schedule, different asset levels are assessed different fees. This way, everyone, regardless of account size, pays the same rate on the same deposit level, which lends 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 above $25 million = 0.50%
Imagine an investor comes in with $50 million in assets they want managed. Using the fee schedule above, the tiered fee calculation would break down as:
$250,000 x 1.75% = $4,375$750,000 x 1.50% = $11,250$4 million x 1.25% = $50,000$5 million x 1.00% = $50,000$15 million x 0.75% = $112,500$25 million x 0.50% = $125,000
Total Fee = $353,125, or 0.70625% annually. However, fees are paid quarterly, so it would be assessed as $88,281.25, or a bit less than 0.18%, with a recalculation every three months to reflect changes in market value. For example, if the market has declined, the absolute fee declines, too, and vice versa.
Investment Management Fees Assessed by Asset Class
Another fee system assesses charges based on asset classes. This sometimes means the client pays low or no fees on cash reserves built up within the client portfolio. The approach tends to be favored by value investors who spend years sitting on large cash reserves only to deploy them rapidly when something crosses their radar. An invested balance fee schedule might look like this:
1.50% on equity investments0.75% on fixed-income investments (such as 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 had 15% of their portfolio in cash, 25% in bonds, and 60% in stocks.
$15,000,000 invested equity x 1.50% = $225,000$6,250,000 invested fixed income x 0.75% = $46,875$3,750,000 parked in cash reserves x 0.00% = $0
Total fee = $271,875, or 1.0875%. The advantage to the client is that during build-up times, or following large deposits, they aren’t paying much, if anything, on their cash. If an account was sitting on something like 30% or 50% cash as the manager looked around for intelligent things to do, the effective fee might be much lower than they would likely otherwise pay, which then gets balanced by the higher fees later.
Hourly Investment Management Fees
Some registered investment advisors charge hourly rates for certain services, many of which are pre-packaged for the sake of convenience. For example, if you aren’t going to have your assets managed by the firm, you might still want them to look over your holdings and review your existing plan. They might charge $250 or $500 per hour with a basic package starting at three or five hours.
Flat Fees Combined With Annual Management Fees
In other situations, you might end up paying a combination of fees that require you to do a little math to determine your annual outlay as a percentage of assets. For example, if you open a $500,000 trust, you might pay a $4,500 base annual fee + a $2,500 sole or co-trustee fee + the fee on the underlying mutual funds your advisor helps you select (ranging from 0.05% to less than 1.00% depending on the specifics). By the time all is said and done, you’re really laying out, directly and indirectly, somewhere around $7,850 if you select a decent mix of domestic and international funds. That’s an effective annual fee of 1.57% on assets, which is a fairly good bargain if the trust fund instrument has simple instructions and doesn’t require holding certain operating assets such as real estate investments.
Stacked Fees
If you work directly with an asset management company, you may just be paying their fee. However, many wealth management firms and financial planners charge fees and then turn around and put you in third-party mutual funds, ETFs, or other pooled investment vehicles that also charge a management fee. For example, it might be more attractive on an after-tax basis to pay a 1.25% annual management fee directly to an asset management company in an individually managed account than to go with a wealth management firm that advertises a 0.75% annual fee but puts you in funds and ETFs that charge a 0.50% fee, which you don’t see unless you read the fine print. You get better service and have more control with the individually managed account.
