Ark Royal Wealth Management's Mike Palmer Quoted in MarketWatch: What Are Reasonable Advisory Fees for Ultra-High Net Worth Clients?

A recent MarketWatch article featured a reader question about advisory fees for someone with $20 million in assets under management, a category known as ultra-high new worth. The question posed was "What is a reasonable fee for clients with this level of assets?" A link to the MarketWatch article can be found here: (https://www.marketwatch.com/picks/im-feeling-out-of-my-depth-i-have-20m-in-assets-and-pay-about-126k-a-year-in-fees-but-the-managers-havent-changed-my-asset-allocation-am-i-getting-ripped-off-94516036). Let's explore this question in more detail.

What's a Reasonable Advisory Fee for a Client with $20 Million? 

It depends on what services you are receiving. Asset management alone at that level tends to be about 44 basis points (.44%) according to industry benchmarking studies. The reader in the MarketWatch article was paying upwards of 63 bps (.63%) for investment management. According to "Michael Palmer, certified financial planner at Ark Royal Wealth Management, the effective fee rate for a sole investment of $20 million seems pricey on the surface. “[But] if you’re getting comprehensive wealth management like yearly tax planning, charitable gifting guidance and estate planning, then that fee is competitive. I looked at some industry benchmarking data and effective fee rate on $20 million across the industry is about 44 basis points,” says Palmer. 

How Do Most Assets Under Management Advisory Fees Work?

Asset under management (AUM) fee tiers, also known as a graduated fee schedule, work by charging a decreasing percentage fee as the client's asset level increases. The principle is similar to how income tax brackets work, but in reverse—the larger the portfolio, the lower the fee applied to the subsequent tiers of assets.

Key Features of Graduated AUM Fee Schedules

• Decreasing Rates: The advisory firm charges the highest fee rate on the smallest tier of assets, and the rate gets progressively lower for each subsequent, higher tier of assets.
• Tiered Calculation: The fee rate is applied only to the specific dollar amount that falls within that tier, not to the entire portfolio.
• Effective Fee Rate: The result of this graduated schedule is that a client's overall, or "effective," fee rate is always lower than the highest rate charged and decreases as the total portfolio value grows.

Is A Financial Advisor Who Charges an AUM Fee Considered "Fee-Only?"

This is an area of great confusion. While it might seem as though an advisor who's charging a percentage of assets is fee-only, this is not accurate. Many advisory firms participate in practices known as revenue-sharing, soft dollar arrangments, and marketing support. This is known as "third party compensation" (such as this one from LPL) and it creates conflcits of interest. For example, an investment firm might agree to share revenue with an advisory firm for being included in the firm's preferred investment model. 

A true fee-only advisor is not conflicted by any such revenue sharing or third party compensation arrangments. The only compensation a fee-only advisor receives is from the client. You can learn more about the fee-only standard at NAPFA.  

Price is What You Pay, Value is What You Receive

Whether your investment portfolio is $2 million or $20 million, consumers should feel as though they are getting value for what they pay. There's probably more financial planning complexity for a $20 million client versus a $2 million client - but not always. A person with a $2 million investment portfolio managed by an advisor might have another $2 million in a deferred comp plan. The financial planner might spend considerable planning time working to optimize the deferred comp strategy, but not charge the typical assets under management for this important planning work. 

When it comes to advisory fees, whether for affluent or ultra-high net worth individuals, there's no one-size-fits-all answer. The "reasonable" fee depends on the breadth and depth of services provided, the complexity of the client's financial situation, and the value delivered by the advisor. It's crucial for clients to evaluate their advisory relationship holistically. This means considering not just the fee percentage, but also the quality of investment management, the comprehensiveness of financial planning services, and the advisor's ability to navigate complex tax, estate, and philanthropic strategies.

For clients with substantial assets, it's especially important to understand the nuances of fee structures, whether the firm has third party compensation arrangements that create conflicts of interest and the important distinction between fee-only and fee-based advisors. Transparency in fee discussions and a clear understanding of potential conflicts of interest are paramount.