A financial advisor offers clients two compensation structures: commission-based or fee-based. Under the fee-based model, the advisor charges an annual fee of 1.25% on assets under management (AUM). A client with a $500,000 portfolio decides to move from a commission-based structure to the fee-based model. What would be the approximate annual fee paid by the client?

Question: A financial advisor offers clients two compensation structures: commission-based or fee-based. Under the fee-based model, the advisor charges an annual fee of 1.25% on assets under management (AUM). A client with a $500,000 portfolio decides to move from a commission-based structure to the fee-based model. What would be the approximate annual fee paid by the client?

Answer options:

• $1,250 ✅ $6,250
• $12,500
• $50,000

Correct answer: $6,250

Explanation: The annual fee is calculated as 1.25% of the assets under management. Therefore, $500,000 * 0.0125 = $6,250.