The Rise of AUM Fees And Why the Next Market Correction Puts the Model at Risk

The percentage-of-assets fee is so embedded in advisory economics that most firms treat it as a fixed constant rather than a business decision. It shapes how you staff, how you plan, and how you define the relationship with clients. But the AUM model is neither as old nor as inevitable as it feels. Understanding where it came from is the first step toward understanding why it may fail you at exactly the moment you need it most.

Origins in the mutual fund era

The AUM fee structure did not begin in the advisory profession. It traces back to the establishment of the U.S. mutual fund industry. When Massachusetts Financial Services launched the Massachusetts Investors Trust in 1924, the first open-end mutual fund in the United States,¹ it charged a management fee based on a percentage of assets. That mechanism linked fund manager revenue directly to portfolio size rather than trading activity, and it became the template for what the industry would later call the expense ratio.

For decades, this was purely a product-based feature. Institutional and retail fund investors accepted that managers earned an annual percentage for overseeing pooled assets. What you now call an AUM fee began as a structural component of investment vehicles, not as a pricing model for personal financial advice.

May Day and the collapse of fixed commissions

The transformation from product pricing to advisory pricing happened fast, and it happened because the industry had no choice. On May 1, 1975, the SEC deregulated fixed brokerage commissions,² ending 183 years of uniform rates set by the exchanges. Until that point, every member firm charged the same minimum fees. Once minimum commissions were abolished, competition surged and transaction-based revenue collapsed almost overnight.

Suddenly the economics of advice no longer worked. If trading commissions could no longer subsidize planning and client service, firms needed a new pricing mechanism. The asset-based fee structure used in mutual funds offered a direct solution: recurring revenue, predictable billing, and a straightforward explanation to clients. May Day didn’t create the AUM model. It forced advisors to adopt what had always been an investment management pricing structure and apply it to advice.

Wrap accounts and the early advisory platforms

The first major step in bringing AUM pricing into retail advice came directly out of deregulation. In 1975, E. F. Hutton introduced a predecessor of the modern wrap account,³ charging clients a single annual fee, expressed as a percentage of assets, covering advice, trading, and research. Asset-based pricing had moved from funds into the advisor-client relationship, and firms embraced the stability that came with it.

In the 1980s, turnkey asset management programs emerged, giving advisors access to outsourced investment management while charging clients annual fees based on asset levels. By 1986, roughly a billion dollars had already flowed into these platforms. Through the 1990s, TAMPs and wrap accounts reshaped the economics of both independent and wirehouse advisors. What had begun as a mutual fund convention had become the dominant framework for retail investment advice.

Standardization in the modern era

By the 2010s, the AUM fee had become the industry standard. The shift away from commissions toward long-term client relationships, financial planning, and discretionary portfolio management cemented asset-based pricing as the default model. More recent data makes the extent of that shift concrete. In 2025, Cerulli Associates reported that 72.4 percent of advisor compensation came from asset-based fees, with that figure expected to exceed 77 percent by 2026.⁴

That concentration is both a measure of success and a structural exposure most firms have not fully priced into their planning.

A hidden vulnerability: revenue fragility during deep market declines

The same simplicity and predictability that make AUM fees attractive create a business model problem during market downturns. Because your revenue is tied directly to asset levels, a market decline instantly becomes a revenue decline. There is no lag, no buffer, and no mechanism for offsetting the drop by working harder.

That exposure becomes clear when you look at the actual history of bear markets rather than the averages. A 40 percent decline is not an outlier. It is a common feature of deep market cycles. The 1973–1974 bear market took the S&P 500 down roughly 48 percent. The Dot-Com collapse pushed the index down 49 percent. The COVID-19 shock produced a 34 percent decline in just over three weeks.⁵

The most directly relevant comparison for advisory economics is the Global Financial Crisis. From October 2007 to March 2009, the S&P 500 fell 57 percent. Balanced portfolios dropped 25 to 35 percent depending on allocation. Advisors saw revenue declines of 25 to 50 percent even as clients required far more communication, planning, and reassurance.⁶

That mismatch is the core problem. Your revenue collapses at precisely the moment your workload increases. Meanwhile, your fixed costs do not. Salaries, technology, compliance, and occupancy expenses remain stable regardless of what markets do. During the 2008 crisis, that gap was real. Firms delayed hiring, cut technology investments, and in some cases sold their practices at distressed valuations. For teams that had expanded staffing during bull markets, the compression was severe.

Run the numbers for your firm. A 40 percent market decline reduces a three-million-dollar AUM practice to 1.8 million in annual revenue. A decline matching 2008, roughly 57 percent, brings that number closer to 1.3 million. Few advisory businesses can reduce costs fast enough to close that gap, and trying to do so in the middle of a client crisis creates its own set of problems.

The future: pricing diversification for a more resilient model

The lesson is not that the AUM model should be abandoned. It remains intuitive for clients and aligns well with long-term portfolio oversight. But its history shows that it was adopted because the economics of the industry changed, not because it was the only logical answer. Today the economics are shifting again, and the firms positioning themselves for the next cycle are not waiting for the correction to prompt the conversation.

As financial planning, tax strategy, income distribution, and behavioral coaching expand in scope and perceived value, the case for subscription fees, retainers, and project-based engagements grows stronger. These structures reduce revenue volatility and align your compensation with work that does not fluctuate with market cycles. They also give you something the AUM model does not: a revenue floor when assets decline.

The next deep market decline will expose the firms that never built one. If your revenue is entirely indexed to asset levels, you will face a choice between cutting service quality and cutting staff. Either option is a problem, and both become harder when clients are watching how you respond. The advisors who diversify their pricing before the correction arrives will be in a position to support clients fully, protect margins, and make decisions from strength rather than pressure. That gap between prepared and unprepared firms will be visible. Make sure you’re on the right side of it.

Subscribe to the Peaks Perspective Newsletter.

Join our newsletter to get topics like this delivered straight to your inbox every month!
Subscribe Now

Endnotes

¹ “Our History.” MFS Investment Management, www.mfs.com/corporate/en/about-mfs/our-history.html. Accessed 23 Mar. 2026.

² “1975 Stock Brokerage Commission Deregulation.” Wikipedia, Wikimedia Foundation, en.wikipedia.org/wiki/1975_Stock_Brokerage_Commission_Deregulation. Accessed 23 Mar. 2026.

³ Paikert, Charles. “Surprise! E.F. Hutton Talks Again as Firm Resurrected.” InvestmentNews, 30 May 2012, www.investmentnews.com/surprise-e-f-hutton-talks-again-as-firm-resurrected-43777. Accessed 23 Mar. 2026.

⁴ Cerulli Associates. “More Than 72% of Financial Advisors Are Compensated by Fee-Based Models.” Cerulli Associates, 18 Mar. 2025, www.cerulli.com/press-releases/more-than-72-of-financial-advisors-are-compensated-by-fee-based-models. Accessed 23 Mar. 2026.

⁵ “S&P 500 Historical Annual Returns.” Macrotrends, www.macrotrends.net/2526/sp-500-historical-annual-returns. Accessed 23 Mar. 2026.

⁶ “S&P 500 Index — 90 Year Historical Chart.” Macrotrends, www.macrotrends.net/2324/sp-500-historical-chart-data. Accessed 23 Mar. 2026.