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AUM or Net Worth Fee Calculation

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Feb 2, 2010 4:20 pm

I’m curious, are any of you using a fee calculation based on net worth, or at least liquid net worth as opposed to AUM? It seems this method has the least conflict of interest for the Financial Advisor, but of course may have greater pushback with some.

Obviously there are other ways of solving this dilemma, including hourly or retainer fees. Just curious what everyone is doing.

Feb 2, 2010 4:27 pm

I think NW fees only make sense if you are truly advising them on everything.

Feb 2, 2010 4:47 pm

How does that have less conflict?

Feb 2, 2010 4:56 pm

I don’t wish for this particular topic to begin a debate, as I think the answer to my first question is helpful to all of us.

To simply answer your question though- It has the potential to have less conflict when you’re advising someone to make a change to your management, and then you can begin assessing your management fees of your own. Whereas, you’re not earning fees when the money is not under your management. If the client might be better off keeping the funds where they are, therein lies the potential conflict of interest.

Feb 2, 2010 5:17 pm

I know that some real high-end wealth management/family office shops charge this way, but it is not common.  You have to show some real value and have a pursuasive argument to do it.

A good example might be a shop that only caters to people with net worths over $25mm.  You might charge 15-20 Bips on their net worth, but that may inlcude tax and legal planning, estate planning, evaluation of outside asset managers, family office services, etc.  In this case, you have to charge either (a) a flat fee, or (b) based on net worth.  Charging just on the assets you have would be rather arbitrary, since in most cases these firms are just choosing outside managers anyway (and the AUM fee paid to the asset firm).

Firms like this will typically service 10-25 families, and it is not really run like an investment advisory business.  It is more like a cross between an advisory business, a CPA firm, and a law firm.

Feb 2, 2010 5:24 pm

Very interesting concept.

Feb 2, 2010 5:26 pm

Nice response B24, thats what I was wondering. Sounds like your practice is different, how have you priced things, if you don’t mind me asking?

Feb 2, 2010 7:03 pm

NE, you have me confused with someone that’s not at Edward Jones.

  I just happen to be familiar with the structure.  My father worked in a family office some years ago (in operations/compliance).
Feb 2, 2010 7:49 pm

My father worked in a family office some years ago (in operations/compliance).

  And you turned out to be a FA?  That's like a Pastor's son becoming a Satanic Priest.
Feb 5, 2010 12:25 am

I have a copy of a survey of advisory rates charged by account size.  The survey I have compiles information from the FPA, NAPFA, Tiburon and others.  If you wish to see a copy, please contact me.  Advisors have told me the survey assisted them in developing their own advisory rates.  Best wishes to all!