The Problem with Asset-Based Fees

The majority of financial advisers and wealth managers in the UK continue to charge clients based on a percentage of assets under management (AUM). While this approach may seem straightforward, it introduces a range of problems that ultimately work against the interests of the client.

Asset-based fees are not inherently linked to the complexity of the advice given or the value actually delivered. Instead, they increase in direct proportion to portfolio size, which often leads to disproportionate costs for clients who have accumulated substantial wealth.

Consider the example of two clients: one with £500,000 in assets and another with £5 million. If both are charged 1% annually, the first client pays £5,000 per year, while the second pays £50,000—even if the level of advice and service required is nearly identical. There is no clear justification for the higher-paying client to be charged ten times more.

The Real Cost of Percentage-Based Fees

Over time, asset-based fees can significantly erode investment returns. If an investor earns an average of 5% per year and pays 1% in fees, they are effectively giving away 20% of their annual return to the adviser. This is before considering product costs, platform fees, or potential hidden charges, all of which can push the total cost of investment management towards 1.5%–2% per year.

For an investor with a £1 million portfolio, paying 1% annually amounts to £10,000 per year in advisory fees. Over a 20-year period, assuming a moderate rate of return, the cumulative impact of these fees could run into hundreds of thousands of pounds—wealth that could otherwise have compounded in the client’s favour.

The Conflict of Interest in AUM Fees

Charging based on assets under management creates an inherent conflict of interest. Advisers who charge in this way have a financial incentive to:

• Keep assets invested, even when other financial strategies (such as paying off debt, gifting, or spending) might be in the client’s best interest.
• Encourage clients to transfer pension assets to be managed under their fee structure, even when alternatives such as remaining in a Defined Benefit scheme might be preferable.
• Overlook non-investment financial planning needs that do not directly increase assets under management.

This conflict leads to a bias in decision-making that can ultimately harm clients rather than helping them achieve their broader financial goals.