What it means
Traditionally, many advisers were paid commissions when clients bought funds. That can encourage frequent trading and the selection of funds that pay the adviser the most.
In an advisory programme, the client pays a regular fee, usually a percentage of the assets under management, so the adviser earns more when the portfolio grows and less when it shrinks. The adviser starts by learning about the client's goals, time horizon and tolerance for risk.
They then choose a mix of funds, such as share funds, bond funds and cash, according to an agreed plan. The adviser monitors the portfolio, rebalances it when the mix drifts and reports regularly to the client.
Many programmes use model portfolios, which are standard mixes of funds for different risk levels, while others tailor the portfolio to the individual. Some give the adviser discretion to make changes without asking each time, whereas others require the client's approval for every trade.
The client should understand which arrangement applies. The fees need careful attention.
The adviser's fee is charged on top of the internal costs of the funds themselves, so the total cost is the sum of the two. Investors should add both numbers together and compare the result with the value of the advice and services received.
A final nuance is that a fee-based approach does not remove every conflict of interest. An adviser may still favour certain funds, and an asset-based fee may discourage advice such as paying off a mortgage with the same money.
Asking how the adviser is paid and what duty they owe the client is always sensible. Reviewing performance fairly is another challenge.
The right comparison is the portfolio's return after all fees against a benchmark that reflects the client's chosen risk level, not against the best-performing fund of the year. Clients who judge their adviser against the wrong yardstick tend to change course at the worst moments.
In practice
Real-world examples.
Example
A dentist with $750,000 of savings joins an advisory programme in which her adviser selects and rebalances a portfolio of funds. She pays a single percentage fee and receives a quarterly report showing performance and costs. She appreciates that the adviser also helps with tax planning and her retirement timetable.
Example
A couple nearing retirement asks their adviser to shift their money to a more cautious mix. Because the adviser has discretion under the programme, the change is made within days, without waiting for paperwork. They later receive a note explaining what was sold and why, and how the new mix fits their plan.
Example
A young professional with $30,000 compares an advisory programme with simply buying a low-cost index fund. After adding the adviser's fee to the fund costs, he decides the guidance is not worth the extra cost at his current savings level. He agrees to revisit the question when his savings have grown.
Formula
Calculation
Advisory fee = Assets under management x Advisory fee rate
Total cost = Assets under management x (Advisory fee rate + Average fund expense ratio)
Suppose a client places $400,000 in a programme with an advisory fee of 1.25%. The advisory fee = 400,000 x 0.0125 = $5,000. If the funds have an average expense ratio of 0.60%, the fund costs = 400,000 x 0.0060 = $2,400. Total annual cost = 5,000 + 2,400 = $7,400, which is 1.85% of the assets.Case study
Seen in the real world.
Lakeview Wealth Partners is an illustrative, fictional advisory firm that charges 1.00% a year on assets in its fund programme. A client with $500,000 asks whether the fee is good value.
The adviser shows that the fee is 500,000 x 0.01 = $5,000 a year, and that the funds cost a further 0.50%, which is $2,500. The adviser then lists the services provided, including planning, rebalancing and tax-aware selling of funds.
The client decides the service is worth the $7,500 total cost but negotiates a lower rate once her assets exceed $1,000,000. The illustrative lesson is that clients should judge advice on total cost and on what they receive in return.
Watch out
Common mistakes.
- Looking only at the adviser's fee and forgetting the internal costs of the funds.
- Assuming a fee-based programme is always cheaper than paying commissions.
- Not checking whether the adviser has discretion to trade without approval.
Questions
People also ask.
How is the fee charged?
Usually as a percentage of the assets, deducted from the account each quarter or month.
Is the fee negotiable?
Often it is, especially for larger accounts, and many programmes reduce the rate in steps as assets grow. It is worth asking for a written schedule showing how the rate falls at each level of assets.
Who is the adviser accountable to?
Rules differ by country, so ask whether they have a legal duty to act in your best interests.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related