rayvt: If the S&P500 does 10% and he does 13%, he gets 25% of the 13%, leaving you with net 7.5%.
How many of these people consistently beat the S&P500 by more than 3%?

If he gets 25% of 13%, you are left with 9.75%, not 7.5%. But yes, it does get rather tedious to figure out the details.

I made the following table to try to compare a 1% AUM advisor matching the SP500 to a Fee Advisor delivering 3% more than the SP500.
The SP500 returns are invented for the next 10 years, and at 5% are on the low side since that's what folks expect.
The Fee advisor delivers 8% annual return for the next 10 years, but with larger variation in returns and not that correlated to the SP500.

Portfolio is initialized at $1M and the fee advisor gets paid 25% of the gains (above previous year-end high) at the end of each year.
The fee advisor earns nothing if the portfolio value at the end of a given year is lower than any prior year-end high.
(That is, if the advisor delivers negative returns, he earns no fees).

      SP500             SP500 Value  1% AUM Adv  1% AUM    Fee Adv  Fee Adv     Fee Adv     Fee Adv
Year  Return            Raw  Value   Net Value   Fee $     Return   Raw  Value  Net Value   Fee $
1     14%               $1,140,000   $1,128,600  $11,400   26%      $1,260,000  $1,195,000  $65,000
2     -8%               $1,048,800   $1,027,929  $10,383   22%      $1,537,200  $1,392,175  $65,725
3     25%               $1,311,000   $1,272,062  $12,849   -15%     $1,306,620  $1,183,349  0
4     5%                $1,376,550   $1,322,308  $13,357   -7%      $1,215,157  $1,100,514  0
5     -4%               $1,321,488   $1,256,722  $12,694   36%      $1,652,613  $1,470,568  $26,131
6     12%               $1,480,067   $1,393,453  $14,075   4%       $1,718,717  $1,514,685  $14,706
7     18%               $1,746,479   $1,627,832  $16,443   -27%     $1,254,664  $1,105,720  0
8     -25%              $1,309,859   $1,208,665  $12,209   50%      $1,881,996  $1,622,607  $35,974
9     16%               $1,519,436   $1,388,031  $14,021   12%      $2,107,835  $1,768,641  $48,678
10    8%                $1,640,991   $1,484,083  $14,991   5%       $2,213,227  $1,834,965  $22,108
 
      Final Value       $1,640,991   $1,484,083                     $2,213,227  $1,834,965
      Total Fees        $0                       $132,421                                   $278,322
      Loss Due to Fees  $0           $156,908                       0           $378,261
      Total Return      64%          48%                            121%        83%
      CAGR              5.08%        4.03%                          8.27%       6.26%

With this scenario, the 8.27% raw return that the fee advisor delivers is reduced to 6.26%, slightly higher than the SP500 return with no fees.
And comfortably higher than the 1% AUM advisor who is just indexing.

Assuming I don't have mistakes in there, this argues that the 25% fee may not be as onerous as it seems.
And this "0 and 25" fee schedule is probably better than "2 and 20", unless the latter has a hurdle rate.


Mark