Definition
An advisory fee charged as a percentage of the money a firm manages for you, deducted from the account each quarter or year rather than billed separately. It is the most common way financial advisors and robo-advisors are paid, and it rises automatically as the account grows.
Why it matters
Percentage fees look small and compound into large sums because they are charged on the whole balance every year, in good years and bad. A 1% annual fee on a portfolio earning 7% leaves roughly a quarter less after 30 years than the same portfolio without the fee.
Example
An advisor charges 1% of assets on a $500,000 portfolio, about $5,000 the first year, taken out of the account in quarterly pieces of roughly $1,250. If the portfolio grows to $1,000,000, the same 1% becomes $10,000 a year even if the advice and time involved have not changed.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.