Which account to pay advisor AUM fees?

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livesoft
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Which account to pay advisor AUM fees?

Post by livesoft »

I do not use an advisor, but I was recently asked from which type of account [should] advisors collect their AUM (assets under management) fees from a total portfolio consisting of one or more different kinds of accounts (tax-deferred, Roth, taxable, client-choice, pro-rata, whatever). And also if the money paid to the advisor is included in (taxable?) income for the client.

This early in the morning I can think that perhaps from a tax-deferred traditional IRA is where AUM comes from and it is not included as a withdrawal nor in income, but is that right? But suppose the client did not have a tax-deferred IRA, but had a traditional 401(k) which perhaps would not be included in the AUM formula.
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Exchme
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Re: Which account to pay advisor AUM fees?

Post by Exchme »

When we had an advisor, they held some cash in each account type as a settlement fund and paid themselves from that in proportion to the assets in the account. So we didn't have an option.
Topic Author
livesoft
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Re: Which account to pay advisor AUM fees?

Post by livesoft »

Exchme wrote: Thu Jun 10, 2021 8:04 am When we had an advisor, they held some cash in each account type as a settlement fund and paid themselves from that in proportion to the assets in the account. So we didn't have an option.
So that is pro-rata, but you didn't get a 1099-R for the removal of money from your IRAs, right?
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HomeStretch
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Re: Which account to pay advisor AUM fees?

Post by HomeStretch »

The last time I looked into this was a while ago so hopefully still true …

There is a Treasury regulation that allows a retirement account’s (i.e., IRA) investment advisory fee to be paid from the account without being considered a taxable distribution (so not reported on Form 1099-R). I did not see the pro-rates advisory fees deducted from my parents IRAs included in my parents’ Form 1099-Rs. However, advisory fees for other accounts (like a Taxable account) if paid from the IRA would be an issue. I can’t recall if it becomes a taxable distribution or considered a more serious ‘prohibited transaction’. So I don’t think the investment firm would be willing to deduct 100% of investment fees from one IRA account for a portfolio with multiple types of accounts.

There wasn’t an issue with deducting 100% of a portfolio’s investment advisory fee from a Taxable account. At the time, such fees could be included as a miscellaneous itemized deductions if >2%.
Last edited by HomeStretch on Thu Jun 10, 2021 8:22 am, edited 1 time in total.
Exchme
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Re: Which account to pay advisor AUM fees?

Post by Exchme »

livesoft wrote: Thu Jun 10, 2021 8:05 am So that is pro-rata, but you didn't get a 1099-R for the removal of money from your IRAs, right?
Correct, no 1099-R
DosCommas
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Re: Which account to pay advisor AUM fees?

Post by DosCommas »

The advisor should allow you to pay the fee from any account you wish or even from an invoice via a check. You might prefer to pay it from your taxable account to keep your tax deferred or tax free accounts growing and prefer to pay it with cash vs selling investments and realizing taxable gains. This is a question for the advisor, but they should be able to collect their AUM fee in a number of ways.
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