What is a fee?
A fee is a fixed price that is charged for a specific service. Fees are charged in different ways, e.g. as costs, charges and commissions. Fees are most commonly found in highly transactional services and are paid in lieu of a salary or wage.
How does a fee work?
Fees are most commonly associated with transactional relationships, particularly with professionals who provide services. In some cases, a fee is charged when an individual hires a company to complete a specific task, such as cleaning a house or filling out taxes. This type of fee is often very transparent as it is a payment for a specific service. Examples of transaction fees include transaction fees for stock market tradesor fees for transferring money.
Types of fees
There are many different types of fees. Individuals and businesses pay fees for a variety of reasons. An individual may pay a fee to a financial advisor for assistance in selecting and managing investments, and a family may pay a fee to a real estate agentwhen selling a home. A business may pay a fee to an accountant to help them with their bookkeeping and to a security company to make sure the building is protected after hours. Governments may charge fees for obtaining a business license or an individual passport. Financial institutions may charge a quarterly deposit fee, and credit unions may charge overdraft fees when cardholders overdraw their accounts.
Fees in asset management
There are both fixed and variable fees in asset management. The most common is the fixed asset management fee. This defines a fixed percentage per year, which is calculated based on the assets under management. In the case of actively managed asset management mandates, there is often a performance fee, which is dependent on the asset manager’s success. This means that the asset manager receives a portion of the profit that he has generated for the client. Other fees can be so-called retrocessions (kick-backs, commissions and the like). However, these are no longer quite so widespread, particularly in Switzerland, after the Federal Supreme Court clarified in several leading rulings that such income belongs to the clients (principals) and not to the asset managers (contractors), unless the clients expressly waive them, in which case they must know the amount.
Each type of fee has its advantages and disadvantages, which is why it is particularly important in asset management to ensure that the fee model is as balanced as possible, taking into account all aspects and incentives in order to avoid conflicts of interest.
Bank and investment fees
Fees charged by banks are rarely transaction-related in the sense that the account holder has not requested a service. In some cases, e.g. when an account is overdrawn or a credit card payment is late, a fee is charged as a contractual penalty.
In other cases, such as when a bank charges checking account holders a monthly fee, the fee has little to do with the cost of maintaining the account. Regulations targeting the activities of banks have reduced or eliminated traditional sources of revenue, prompting these organizations to find other sources.
Investors trading shares, investment funds and options face a variety of fees. When trading shares, a fee is often charged per trade, known as a transaction fee. An investor who wants to invest money in investment funds has to reckon with costs such as the Total Expense Ratio (TER).