The 1% Fee: What It Costs and What It Can Quietly Discourage

How much does a financial advisor cost? The usual fee

Most investment advisers charge a fee that is a percentage of your account. The SEC describes it this way: the fee "is typically based on the value of all of the assets held in your account with the adviser" (Investor.gov, Investment Advisers, checked October 14, 2026). This is called an assets under management (AUM) fee.

The often-quoted figure is 1% a year. One industry survey of nearly 1,000 advisors found a median fee of 1% on accounts up to $1 million, 0.85% above $1 million, 0.75% above $2 million, 0.65% above $3 million and 0.50% above $5 million (Kitces.com, Independent Financial Advisor Fees Comparison, July 31, 2017). The same report found a median of 0.50% a year in underlying fund expenses on top of the advisory fee. The data is from 2017, so treat it as a rough guide, not today's market price.

The arithmetic is simple. A 1% fee on $1,000,000 is $10,000 a year. On $2,500,000 it is $25,000. Many firms use tiers, for example 1% on the first $1 million and a lower rate above that, so ask for your blended rate in dollars.

Every registered firm must publish its fee schedule, say whether fees are negotiable, and say whether fees are deducted from your account or billed to you, in Item 5 of its brochure (SEC, Form ADV Part 2 instructions, Item 5, checked October 14, 2026).

The fee you never see a bill for

When the fee is deducted from the account, you never write a check. The cost shows up as a line on a statement, or as a slightly smaller balance.

The bigger cost is what that money would have earned. The SEC puts it this way: "not only is your investment balance reduced by the fee, but you also lose any return you would have earned on that fee." In its example, $100,000 growing 4% a year for 20 years ends nearly $30,000 lower with a 1.00% annual fee than with a 0.25% fee (SEC Investor Bulletin, How Fees and Expenses Affect Your Investment Portfolio, SEC Pub. No. 164, February 2014).

The same bulletin's advice: "be sure you understand and compare the fees you'll be charged." Converting the fee to dollars is the first step. The table below does that for a $1,000,000 account, and the advisor fee calculator does it for your own numbers.

What an asset-based fee can quietly discourage

The SEC is direct about the incentive. Its instructions for the client relationship summary give this example of a conflict: "the more assets there are in a retail investor's advisory account, the more a retail investor will pay in fees, and the firm may therefore have an incentive to encourage the retail investor to increase the assets in his or her account" (SEC, Form CRS Instructions, checked October 14, 2026).

The other side of that incentive is less discussed. Under a percentage fee, several sound retirement moves shrink the managed account, and so shrink the fee:

• Paying Roth conversion tax from the brokerage account. The tax bill leaves the account the advisor manages.
• Spending down for income. Drawing savings to delay Social Security lowers the managed balance for years.
• Buying an income annuity. Money that goes to an insurer usually leaves the managed account.
• Paying off a mortgage. A large payoff moves money out of the account and into the house.

None of these is right for everyone. The point is narrower: the advisor is paid less if you do them. SEC staff wrote that all broker-dealers, investment advisers and financial professionals "have at least some conflicts of interest," including "an economic incentive to recommend products, services, or account types that provide more revenue," and that disclosure alone does not satisfy the duty to act in the client's best interest (SEC staff, Conflicts of Interest Staff Bulletin, August 3, 2022).

Many advisors raise these topics anyway, and do it well. The conflict is structural, not a judgment of any one person. Knowing it exists tells you which questions to ask.

What "fiduciary" does and does not mean

A registered investment adviser is a fiduciary. The SEC says the adviser "must, at all times, serve the best interest of its client and not subordinate its client's interest to its own," through a duty of care and a duty of loyalty, and must "eliminate or make full and fair disclosure of all conflicts of interest" so the client can give informed consent (SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release IA-5248, June 5, 2019). That is a real legal duty, not a slogan.

Two limits matter. First, the duty applies "in a manner that reflects the agreed-upon scope of the relationship" (same source). If your agreement covers investment management only, advice on Roth conversions, Social Security timing or Medicare surcharges may be outside it. Second, a fee conflict is usually handled by disclosure, not removal. The fee stays; it is just written down.

Some advisors are also paid commissions for selling securities or insurance products. If anyone at the firm accepts that kind of pay, Item 5.E of the brochure must say so and explain the conflict (SEC, Form ADV Part 2 instructions, Item 5.E). Read it, and see fee-only vs fee-based for how the labels differ.

When a percentage fee can be worth it

A good advisor on a percentage fee can earn it. Ongoing management, rebalancing, tax-aware withdrawals, keeping you invested in a bad year, and a steady hand for a surviving spouse all have real value. For a household that does not want to run its own portfolio, that service may be worth more than its cost.

The fee is easier to justify when the advisor plans across your whole picture (taxes, Social Security, Medicare, estate), not only the investments, and when the fee falls as balances grow. Fees are often negotiable, and the brochure must say whether they are (SEC, Form ADV Part 2, Item 5.A).

Other ways to pay exist. Some planners charge a flat or hourly fee that does not rise with your balance; see flat-fee financial planners. Before you meet anyone, look up the firm's brochure on the SEC's Investment Adviser Public Disclosure site and its relationship summary at Investor.gov/CRS. If a Roth conversion is on the table, the Roth conversion calculator shows the tax side.

A plain example with numbers: $1,000,000 over 20 years

Hypothetical: $1,000,000, an assumed 6% gross return every year, no withdrawals, no taxes and no fund expenses. Each year the account grows 6%, then the fee is charged on that year-end balance.

The arithmetic for the 1% row: year one, $1,000,000 grows to $1,060,000, the fee is 1% of that ($10,600), leaving $1,049,400. Repeat for 20 years: $1,000,000 x (1.06 x 0.99) to the 20th power = $2,623,138. With no fee, $1,000,000 x 1.06 to the 20th power = $3,207,135. The fees themselves add up to $348,285; the remaining $235,712 of the gap is the growth those fees would have earned.

The difference between the 1% and 0.25% rows is $427,393 at year 20. The 6% return is an assumption, not a forecast, and real fees are often tiered. The point is the shape of the curve, not the exact figure.

Sources

The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.