The Status Quo Tax

We don’t love taxes at Redbud. You probably don’t either. But there’s another cost that never shows up on a return. It scales with your success and compounds quietly. We call it the Status Quo Tax, and it comes from fees charged as a percentage of assets under management.

If you pay one, or are thinking about hiring a firm that charges one, it’s worth doing the math. Most people never do.

How it works

Most advisory firms, from private banks to boutiques to large multi-family offices, charge a percentage of assets under management. When nearly every option is priced the same way, the pricing model becomes invisible.

The model has a built-in problem. The fee rises every year your portfolio grows, whether or not the work does. When the market goes up, your advisor gets a raise. You took the risks and built the assets. The fee grows with them anyway.

The true cost of 0.5%

Half a percent sounds small. On a $50 million portfolio, it’s $250,000 in the first year.

Assume the portfolio earns 7% a year before fees. A 0.5% fee charged on the balance brings that down to about 6.47%. Over 20 years:

	AUM fee (0.5%)	Flat fee ($150,000, rising 3%/yr)
Total fees paid	$10.3 million	$4.0 million
Portfolio after 20 years	$175.0 million	$185.7 million

Assumes 7% annual returns before fees, fees paid from the portfolio at year end, and no taxes or withdrawals. The flat fee starts at $150,000 and rises 3% a year, reaching about $263,000 in year 20. Hypothetical, for illustration only.

Same portfolio, same market. The fee model alone is worth about $10.7 million.

The AUM fee rarely shows up as a dollar figure. It’s expressed as a percentage and deducted automatically, so few clients could tell you what they paid last year.

Fee savings are only part of the picture. Tax strategy, entity structuring and estate design can add meaningfully to after-tax returns. As an illustration only: if that work added 1% a year, the same $50 million would end about $39 million higher after 20 years. Any firm could do that work. The question is whether its fee model rewards it.

What you’re actually paying for

The stated fee. Often 0.5%, sometimes stepping down to around 0.25% above certain thresholds. It’s deducted automatically, so most clients never see it in dollars.

Fees inside the funds. Some AUM firms also run their own funds or fund-of-funds and earn fees at more than one level. It’s worth asking how that shapes the advice you get about where to invest.

Conflicted advice. Every dollar you spend, give away or put into a direct investment reduces an AUM advisor’s revenue. A $5 million direct real estate investment cuts their fee by $25,000 a year. They may support the decision, but their business model doesn’t.

The illiquid side of your balance sheet. As wealth grows, more of it sits in private equity, real estate and operating businesses. Take a $150 million family with $10 million in liquid, billable assets. A firm paid on that $10 million has little reason to spend time on the other $140 million. That’s often where the most valuable planning is: entity structure, tax-aware exits, estate design.

In one case we reviewed, a $22 million portfolio was paying about $209,000 a year, roughly 0.95%, for what was marketed as a custom allocation. Its holdings had about a 0.8 correlation with the S&P 500.

Why the model persists

AUM revenue grows with the market, with no matching increase in the cost of delivering the service. A firm managing $2 billion at 0.5% earns $10 million a year, and more every year the market rises. That’s a good business, so firms have little reason to change it.

The work of serving a $100 million household is real and should be paid fairly. The problem is a fee tied to market returns instead of the scope of the work. Flat, complexity-based fees are still the exception.

Can your advisor outperform the fee?

The usual answer is that the advisor earns the fee through performance. To match the flat-fee portfolio above, an advisor charging 0.5% would need to earn about 7.32% a year before fees, beating the market by roughly 0.32 percentage points every year for 20 years.

That’s hard to do consistently. Over the last 20 years, roughly nine in ten actively managed U.S. large-cap funds trailed the S&P 500, according to S&P Dow Jones Indices’ SPIVA U.S. Scorecard.

How we do it

We built Redbud around a flat fee. It’s tied to the complexity of the work, using roughly 30 factors, and it’s a known dollar amount before the relationship begins. It rises with inflation, not with the market, so it’s the same whether the market is up 25% or down 10%.

That means our revenue doesn’t change when a client makes a direct investment, gives to family or pays down debt. We can judge those decisions on their merits. It also lets us spend time on the illiquid side of the balance sheet, where much of the planning opportunity is.

Each year we track the tax savings we identify for each client and report them back.

If you’d like to know what your current fee is costing you over time, we’re happy to walk through the math with you. No preparation needed.

— Adam