Asset-based fee
A financial planning fee charged as a percentage of the client's assets under advice, instead of a flat rupee amount.
In plain language
When an adviser charges for financial planning, the fee can be worked out in more than one way. A one-time fee for a plan is a fixed rupee amount. A referral fee goes to another expert brought in for a specific task.
An asset-based fee works differently. The adviser charges a percentage of the value of the assets the client has asked the adviser to advise on. A client with a bigger portfolio pays a bigger fee in rupees, even though the percentage charged may stay the same.
How it works
The workbook lists the asset-based fee as one of the fee types a fee-only Investment Adviser may charge, alongside a one-time plan fee, an ongoing review fee, referral fees, and fees for portfolio construction or for analysing a client's financial position.
Because it is asset-based, the fee rises and falls with the value of what is being advised on. If markets rise and the client's portfolio grows, the rupee fee grows too, even without any extra work by the adviser. If the portfolio falls, the fee falls. SEBI's rule that a fee-only adviser earns only from the client, never from the product producer, applies to this fee just as it does to the other types.
A worked example
Anand is a SEBI-registered Investment Adviser who charges 1% a year of the assets he advises on — a rate he sets in his own fee schedule, since the workbook does not fix one.
His client Priya has Rs 40 lakh under his advice. Her annual fee is 1% of Rs 40,00,000, which comes to Rs 40,000.
A year later, Priya's portfolio has grown to Rs 55 lakh after market gains and fresh investment. At the same 1% rate, her fee is now 1% of Rs 55,00,000, or Rs 55,000 — Rs 15,000 more, without Anand doing any extra work, simply because the assets he advises on have grown.
Why NISM asks about it
Chapter 1, section 1.6, 'Financial advisory and execution', lists the asset-based fee among the components of a fee-only adviser's charges, next to the one-time plan fee and referral fees. A question may ask you to identify which fee structure moves with the size of the client's portfolio — the asset-based fee — as opposed to a flat one-time fee.
Common exam traps
- An asset-based fee is charged by a fee-only adviser on assets advised on, not necessarily assets the adviser holds or manages — the adviser may not have custody of the client's money at all.
- Do not confuse it with a performance or profit-sharing fee, which is charged only on gains above a hurdle rate, as in a PMS. An asset-based fee is charged on the whole asset value, whether the client made money or not.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Aggregation modelA distribution model where a central company selects and shortlists products for a network of affiliated distributors, who share revenue with it in return for research, technology and support.
- Catch-up and no catch-upTwo ways a PMS profit-sharing fee is calculated once returns cross the hurdle rate: 'no catch-up' charges only the gains above the hurdle; 'catch-up' charges the entire gain from the first rupee.
- Fee-only adviserAn investment adviser who earns income from fees paid by the client — not commissions from product providers — and typically does not execute the transactions advised.
- CeFCoMThe Centralized Fee Collection Mechanism, managed by BSE Limited, an optional SEBI-recognised channel through which a client can pay an Investment Adviser's fee, instead of paying the adviser directly.
- Fixed costIn a Portfolio Management Service, the charge the investor pays regardless of performance — usually a set percentage of assets managed, plus brokerage — as against the separate performance-linked fee.