Tiered, breakpoint or flat advisory fees: how each one is calculated
A flat fee charges one rate on the whole billable balance. A tiered, or blended, schedule charges each slice of the balance at its own rate, so the first slice is billed at the first rate, the next slice at the next rate, and so on. A breakpoint schedule applies a single rate to the whole balance once it crosses a threshold. The same balance gives three different fees, so the agreement and the billing method must say exactly which one applies.
Two advisers both say they charge "1% on the first million, then 0.75%". One bills a $1.5 million client $13,750 a year. The other bills $11,250. Neither made a mistake. They're using different methods, and only the agreement says which is right.
What's the difference between the three schedules?
| Schedule | How it works |
|---|---|
| Flat | One rate on the whole billable balance. |
| Tiered (blended) | Each slice of the balance is billed at its own rate, then the slices are added up. |
| Breakpoint | Once the balance crosses a threshold, a single rate applies to the whole balance. |
A worked example
A hypothetical schedule: 1.00% on the first $1,000,000, 0.75% on the next $1,000,000, 0.50% above $2,000,000. A flat-fee comparison at 1.00%. The client's billable balance is $1,500,000.
| Method | Calculation | Annual fee | Quarterly |
|---|---|---|---|
| Flat 1.00% | $1,500,000 × 1.00% | $15,000 | $3,750.00 |
| Tiered | $1,000,000 × 1.00% + $500,000 × 0.75% | $13,750 | $3,437.50 |
| Breakpoint | $1,500,000 × 0.75% | $11,250 | $2,812.50 |
The tiered fee works out to an effective rate of about 0.92%. That's the number clients often ask about, so be ready to show how you got it.
What is the breakpoint cliff?
With a breakpoint schedule, crossing a threshold drops the rate on the whole balance. Using the same rates:
| Balance | Rate applied | Annual fee |
|---|---|---|
| $990,000 | 1.00% | $9,900 |
| $1,010,000 | 0.75% | $7,575 |
The client with $20,000 more pays $2,325 less. Tiered schedules don't have this problem because only the slice above the threshold gets the lower rate.
What should you write down?
- The method: flat, tiered or breakpoint, in those words.
- The tiers and rates exactly as in the agreement.
- Whether tiers apply per account or to the combined household balance.
- How a household fee is split back across accounts.
- The billable balance and valuation date the tiers are applied to.
- Rounding rules.
Common mistakes
- Applying a tiered schedule as a breakpoint, or the reverse.
- Applying tiers per account when the agreement says household.
- Using a single "blended rate" from last year after the balance changed.
- A spreadsheet formula that only handles two tiers when the schedule has three.
When is this overkill?
If every client is on one flat rate, there's little to document beyond the rate and the billable balance. The moment you add a second tier, write the method down and test it on a few balances before the next billing run.
How Advorra fits
Advorra runs quarterly billing in arrears with exclusions set on the record, and each run lands on a billing blotter you can look back on. Keep your fee method written in your procedures and check a sample of bills each quarter. See the product page, or read household billing, changing your fee schedule and billing spreadsheet or software.
One thing to do this week: take three clients at different balances and recalculate their last bill by hand, using the exact method in their agreement.
The rates are made up to show the arithmetic. Not pricing, billing or compliance advice.
Questions advisors ask
Which schedule is most common?
Firms use all three. What matters for operations is that the agreement names the method clearly and the billing calculation follows it exactly.
What is the breakpoint cliff?
With a breakpoint schedule, a balance just over a threshold can pay a lower total fee than a balance just under it, because the lower rate applies to everything. Tiered schedules avoid this.
Are tiers applied per account or per household?
Whatever the agreement says. Household grouping usually means the combined balance moves through the tiers, and the fee is then split back across the accounts.
How do I show a client how their fee was calculated?
Show the balance, each tier, the rate on each tier and the total. A short table is clearer than a single blended percentage.
Is this pricing advice?
No. The rates here are made up to show the arithmetic. How you price is your decision, with your compliance consultant on disclosures.
See it on a demo firm
Advorra is practice software for independent RIAs: clients, models, IPS, billing and compliance records in one place, on top of the custodian you already use. Built by The CollabHub.
Get in touch