Where Did the 1% Advisory Fee come From?

If you’ve ever worked with a financial advisor, you’ve probably heard some version of this: “We charge 1%.” It’s become so common that most people don’t even stop to ask where that number came from. Why 1%? Why a percentage of your assets? And is 1% still the right way to pay for financial advice?

The short answer is that there isn’t one person who invented the 1% advisory fee. The story is a little more complicated – and that’s exactly why it’s worth taking another look.

The Short Story of the 1% Fee

Charging a percentage of assets isn’t new. Investment managers have used asset-based fees for decades. Mutual funds, for example, have historically charged investment advisory fees based on the assets they manage. Courts were already examining whether those fees were reasonable in cases involving large investment funds in the 1970s and 1980s.

However, the 1% fee became much more recognizable in the retail financial advice world later on. For much of the brokerage industry’s history, brokers primarily made money through commissions. Buy something? There was a commission. Sell something? There was another commission. Then the industry began changing.

In 1975, fixed brokerage commissions ended, and technology continued to push transaction costs lower. By the 1990s, brokerage firms increasingly experimented with accounts that charged clients an ongoing percentage of their assets instead of relying entirely on commissions for each transaction.

The 1995 Tully Committee also recommended moving toward compensation based on account assets rather than trading activity. One reason was straightforward: if an advisor gets paid every time a client trades, the compensation structure can create an incentive to trade. An asset-based fee removed that particular connection.

Eventually, the 1% model became a familiar number. And once something becomes familiar, we tend to stop asking questions about it.

So Why Do We Still Use 1%?

Today, 1% remains a common advisory fee. Industry research continues to show it as a typical fee level for portfolios around $1 million, although many firms use tiered pricing that reduces the percentage as assets increase. But here’s the thing – “that’s what everyone charges” isn’t necessarily an explanation of what you’re receiving for the fee.

Paying 1% on your assets each year doesn’t automatically make the fee unreasonable. An advisor may provide substantial investment management, financial planning, tax coordination, retirement planning, estate planning, and ongoing advice in exchange for that fee. The point is simply that the percentage deserved context.

Maybe We Should Take Another Look

The financial industry has changed dramatically since asset-based fees became common. Technology has changed. Investment costs have changed. Trading costs have changed. Financial planning has changed. And the services an advisor provides can vary significantly from one firm to another.

So perhaps the better question isn’t whether 1% is good or bad. Instead, ask what you’re actually getting for the 1% you’re paying. Does your advisor simply manage your investments? Do they help coordinate your retirement income or review your tax strategy? How often do you actually hear from them? It’s important to understand if the way you’re being charged makes sense for the services you’re receiving.

The 1% Fee Isn’t the Problem. Not Understanding It Is.

There isn’t anything inherently wrong with charging a percentage of assets. For some clients and some advisors, it can be a straightforward way to pay for an ongoing relationship. However, the fact that 1% has become the industry norm doesn’t mean it should go unquestioned. Your financial plan deserves more than a number that has simply become familiar.

So the next time someone tells you, “We charge 1%,” don’t just ask whether that’s expensive. Ask what the 1% actually pays for. Because sometimes the most important financial question isn’t how much you’re paying. It’s what you’re getting in return.