What does an "Assets Under Management" fee typically entail for a financial planner?

An "Assets Under Management" (AUM) fee is commonly structured as an annual fee that is calculated based on the total value of assets that a financial planner manages on behalf of the client. This means that the fee typically reflects a percentage of the total investments held in the client’s portfolio, which aligns the interests of the financial planner with those of the client. As the value of the investments increases, so does the management fee, incentivizing the planner to grow the client’s assets.

This model is prevalent in the financial planning industry because it allows for a straightforward and transparent fee structure. Clients can easily understand how fees relate to the performance and size of their investment portfolio. It contrasts with other fee structures, such as flat monthly fees or fees tied specifically to contributions or withdrawals, which may not directly correlate with the overall management of the client’s investments. This alignment of interests can foster a stronger relationship between clients and planners, as both parties benefit from the growth of the portfolio.