If you have a financial advisor, you are likely familiar with the various fee structures they may use to calculate their charges. Establishing a relationship with a financial advisor requires a significant amount of trust, whether you are seeking advice or entrusting them to manage your investments.
But what happens if your trusted advisor accidentally overcharges you? Do they simply owe you the amount you overpaid, or are they required to include interest? And if so, how is that interest calculated?
Consider the case of Jeff, who has been working with the same financial advisor for a decade. Recently, Jeff discovered that he had been overcharged for advisory fees for the past 10 years, resulting in almost $15,000 in excess payments. Unsure if the compensation offered by the advisor’s firm was fair, Jeff contemplated reporting the incident to a regulatory body.
To determine if you are being charged accurately, it is essential to understand the fee structure employed by your advisor. Fee-only advisors do not accept commissions for their services and may charge hourly, as a retainer, as a percentage of assets, or a fixed rate. If their fee is based on a percentage of assets, it is referred to as “assets under management” (AUM).
Advisors using an AUM fee structure may have minimum asset requirements for clients and employ a tiered system where fees decrease as assets increase. This tiered structure can result in lower fees for larger asset values, such as 1% on the first $500,000 and 0.5% for amounts exceeding that threshold.
While it may be easier to detect overcharges with fixed rate, hourly, or retainer fee structures, AUM fees can be more challenging to identify as they are directly withdrawn from your investment account. This can lead to fees “flying under the radar,” as noted by Kathryn Berkenpas of the CFP Board.
AUM is the most common type of advisor compensation, with approximately 72% of advisors using this fee structure in 2024. It is expected that 78% will continue to utilize AUM in 2026, according to Cerulli Associates.
In Jeff’s case, his advisor utilized an AUM fee plan with a tiered structure based on account value. While his account initially fell below the $500,000 threshold, it had since surpassed $1 million over the past decade. Despite this increase, Jeff was mistakenly charged a 1% fee for the entire duration, resulting in around $15,000 in overpayments.
In addition to being reimbursed the overpaid amount, Jeff is entitled to receive interest on the excess payments. This interest is calculated using the Department of Labor’s Table of Underpayment Rates.
Instances of overbilling and inaccurate fee calculations, like Jeff’s situation, are not uncommon among financial advisors. The SEC Division of Examinations’ 2021 risk alert highlighted rate errors, emphasizing the importance of accurate fee assessments.
If faced with a similar scenario, individuals can seek guidance from regulatory bodies such as the SEC or the Financial Industry Regulatory Authority. To protect yourself from overpaying fees, request regular reports detailing your charges and ensure you fully understand your advisor’s fee structure.
If an advisor is unable or unwilling to explain their cost breakdown or provide detailed reports, it may raise concerns about their professionalism and trustworthiness. Stay informed and vigilant to ensure your financial interests are safeguarded.
