What Is A Reasonable Fee?

You may wonder if you need to pay financial professionals more for better returns. On the contrary, the lower the fees, the higher your odds of success usually. Fees and costs squander returns. The only thing that higher costs guarantee is that more wealth will drain from your account to the pockets of your broker/advisor. And research has shown that disciplined investing with lower-cost investments has, in the long run, outperformed more expensive conventional, speculative strategies (see our Resources section). Minimizing your costs remains one fundamental principle that improves the odds of investment success. Since you put up 100% of the capital and take 100% of the risk, you should maximize how much of YOUR returns you keep.

So, what is a “reasonable” AUM fee? Bob Veres is a Financial Planning columnist in San Diego and publisher of Inside Information, considered the most important information resource in the financial advisory space. In 2017 he conducted a comprehensive fee survey (2017 Planning Profession Fee Survey). Here is a summary of the findings.

AUM Fee Levels

Without clear profession-wide data, it is difficult to determine “reasonable” fees for client portfolios. 1% has been thrown around as an “industry standard,” but is this true for portfolios of all sizes? Is it true for ANY size? Bob’s survey sought to address this question in the most straightforward possible way: by asking survey respondents to provide us their AUM fee level for client portfolios of different sizes. On average, SCM Investment Services fees were lower than 85% of firms.

Portfolios below $250,000
Median: 1.00%

Portfolios $250,000 – $500,000
Median: 1.00%

Portfolios $500,000 – $1M
Median: 1.00%

Portfolios $1M – $2M
Median: .85%

Portfolios $2M – $3M
Median: .75%

Portfolios $3M – $5M
Median: .65%

Portfolios $5M – $10M
Median: .50%

Total Costs

Of course, AUM fees are only one component of the total costs. There are inherent portfolio costs, such as mutual fund expense ratios. There are also trading costs, which can be significant, especially for conventional investment strategies that attempt to outguess the markets. So, are there industry standards for some of these other costs? The charts below summarize the total cost distribution for portfolios of different sizes. On average, SCM Investment Services was on the lower end of the fee spectrum than almost 90% of all firms. This isn’t surprising since we construct portfolios using low-cost Dimensional Fund Advisors mutual funds, which are consistently ranked among the highest in the industry and cost much less than the industry average.

Portfolios below $250,000
Median: 1.85%

Portfolios $250,000 – $500,000
Median: 1.75%

Portfolios $500,000 – $1M
Median: 1.65%

Portfolios $1M – $2M
Median: 1.50%

Portfolios $2M – $3M
Median: 1.40%

Portfolios $3M – $5M
Median: 1.30%

Portfolios $5M – $10M
Median: 1.20%

Conclusion

Pay attention to your expenses. Although you can’t control the markets, you can control how much you pay for market access. Higher fees do not guarantee better returns nor provide access to privileged strategies that outperform. Returns simply do not correlate with fees. On the contrary, research and real-world evidence have shown it’s actually lower costs that can help improve your odds of investment success in the long term.

Results assume a 10% average annual return and a 2.0% annual expense ratio. The results are hypothetical and do not represent any particular mutual fund. Source: personal.vanguard.com.