Wealthy investors paying 1% of assets under management may overpay by $50,000 annually compared to flat-fee structures.
A $5 million portfolio incurs $50,000 in annual fees under the 1% assets under management model, while flat-fee advisors charge $8,000 to $15,000. Over 20 years at 6% real returns, the difference compounds to $1.1 million.
The AUM pricing model originated in the 1970s, when advisors manually picked stocks and earned trade commissions. Today, most portfolios use low-cost index funds and software-driven rebalancing, reducing the workload.
A $10 million portfolio faces $100,000 in annual AUM fees, while flat-fee advisors remain in the $8,000 to $15,000 range. The gap represents capital that could otherwise remain invested.