You may be wondering if you need to pay financial professionals more for better returns. On the contrary, the lower the fees, usually much higher are your odds of success. Fees and cost squander returns. The only thing that higher costs guarantee is that more wealth will trickle up from your account to the pockets of your broker/advisor. And research has actually 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 of the key principles 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
In the absence of 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. SCM Investment Services fees were on average lower than 85% of firms.
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 costs distribution for portfolios of different sizes. SCM Investment Services was on the lower end of the fee spectrum, on average lower than almost 90% of all firms. This isn’t too surprising since we construct portfolios using low-cost Dimensional Fund Advisors mutual funds, which are not only consistently ranked among the highest in the industry, but also cost much less than the industry average.
Pay attention to your expenses. Although you can’t control the markets, you can control how much you pay for access to the markets. Higher fees do not guarantee better returns, nor do they 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.