Performance and Management Fees
In the world of business, you might get across two common terms that are typically used: performance and management fees. Most often, especially among those who are just new in the industry, these two can be confusing, and others may even find the definitions of each term complicated.
Performance fees are charged by an investment manager to a client account or an investment fund for managing their assets. A performance fee can be calculated in several ways. It is generally dependent on the change in net, for both realized and unrealized gains. In some cases, however, it may also be based on other factors, such as the net income generated. In respect to the use on hedge funds as well as other types of investment funds, it is often calculated in reference to the overall increase in the net asset value of the client’s funds, representing the value of the investments.
In the USA alone, performance fees that are charged by certified investment advisers are under certain requirements, which have been stipulated under the 1940 Investment Advisers Act. On top of that, performance fees can also be charged towards registered investment companies, but under certain conditions only. Lastly, they can also be charged to pension plans that have been governed by ERISA, but they also need to meet specific requirements.
Management fees are commonly used in the industry of investment advisory. It refers to a periodic payment, which is often paid by an investment fund to the investment adviser of the fund for the offered portfolio and investment management services. Most often, the fee does not just cover investment advisory services, but also administrative services. Most often, the fee is calculated as a specific percentage of the assets under management.
As a standard rule, the fees are generally higher if your money has been actively managed, which is often the case with almost all of the mutual funds these days. More effort is being placed in managing the money as compared to those that are not actively managed. For instance, fund managers research different stocks, making purchases depending on what they think and feel will give them the best return rate. The ultimate goal here is to possibly get higher returns for the investment money of the clients.
It is very important to understand the importance of each term because you need to know what to expect, especially if you are the one that needs to pay either the performance or the management fees. Once you have identified which type of fee you need to pay for the services and assistance that you receive, it is also as important to dig deeper into the type of fee.