The Violation of Fiduciary Duties: A Critical Examination of AUM Fees in Investment Advisory

Sean Sevey |

The fiduciary duty of an investment advisor is a cornerstone of the financial services industry, emphasizing the obligation to act in the best interests of clients. However, the commonly used Assets Under Management (AUM) fee structure raises concerns about its compatibility with these fiduciary obligations. This paper contends that AUM fees, while widespread, may inherently violate the fiduciary duties of investment advisors.

  1. Lack of Fee Transparency: One of the primary tenets of fiduciary duty is transparency. AUM fees, calculated as a percentage of total assets under management, often result in fee structures that are opaque and complex. This lack of transparency can hinder clients' ability to fully comprehend the fees they are paying, thereby violating the duty of loyalty, which mandates a fiduciary to act in the best interest of the client, including providing clear information about compensation.
  2. Incentives Misalignment: AUM fees create a direct link between the compensation of the investment advisor and the size of the client's portfolio. While it is reasonable for advisors to be compensated for their expertise, this structure may incentivize advisors to prioritize asset growth over the client's individual financial goals. This misalignment of incentives raises questions about whether advisors are truly acting in the best interest of their clients, thus violating the duty of loyalty.
  3. Lack of Fee Customization: AUM fees are often charged as a percentage of total assets, regardless of the complexity or uniqueness of the client's financial situation. This one-size-fits-all approach contradicts the duty of care, which requires fiduciaries to tailor their services to meet the specific needs and circumstances of each client. A lack of fee customization may result in clients paying for services they do not require or receiving inadequate attention in areas critical to their financial well-being.
  4. Potential for Overcharging: As portfolios grow due to market appreciation or additional contributions, AUM fees increase proportionately. While advisors may argue that this aligns with the principle of charging for the value provided, it also raises concerns about overcharging. The duty of care mandates that fees be reasonable in relation to the services rendered, and a fee structure tied to total assets may not always reflect the effort and expertise required to manage a larger portfolio.

While AUM fees have become a standard practice in the investment advisory industry, their alignment with fiduciary duties deserves critical examination. The lack of fee transparency, potential for misaligned incentives, failure to customize fees, and the risk of overcharging collectively cast doubt on the compatibility of AUM fees with the fiduciary obligations of an investment advisor. It is imperative for the industry to consider alternative fee structures that better align with the principles of transparency, loyalty, and customized client care, ensuring that the fiduciary duty remains the guiding principle in financial advisory relationships.

At Sevey Wealth, we are proud members of the Flat Fee Revolution. We are 100% independent; we do not work for any Broker Dealer, Bank or Insurance Company. We do not have product or sales goals. We do not earn commissions. We only work for you. By being custodian and product agnostic, combined with the ability to leverage the strengths of different platforms, we are a company that finally delivers on TRUE FIDUCIARY responsibilities.