The Bogleheads' Guide to Investing

by Mel Lindauer

There are good and bad features with the AUM payment arrangement, depending on the advisor. On the plus side, since your annual fee is paying the advisor, the advisor is free to offer good, no-load mutual funds and other appropriate low-cost investments. On the downside, many good advisors often have higher minimum account requirements that may be out of reach for many investors. And, even if you can meet the advisor’s minimum account requirements, paying up to 2 percent for a bond fund that’s only yielding 4 percent is very costly. In fact, it can consume up to 50 percent of your return. And even with a return of 8 percent per year, a 2 percent fee still represents 25 percent of your total return. It’s important to remember, too, that even in bad years, when your portfolio might suffer a loss, you’ll still be paying the AUM fee. Obviously, then, you want to choose a good financial advisor whose fee is on the low end of the range, since every dollar you pay in fees reduces your total return by an equal amount.