What is a management fee?
A management fee is a fee charged, for example, by an asset manager for the management of assets. The management fee is intended to compensate asset managers for their time and expertise in selecting shares and managing the portfolio.
How a management fee works
The management fee is the price for the professional management of your assets. The fee compensates professional asset managers for selecting securities for the portfolio and managing the portfolio based on the investment objectives and profile. The management fee structure can vary, but it is usually based on a percentage of assets under management. For example, the management fee could be set at 1% of assets under management.
Differences in management fees
Management fees can range from 0.10% to 3%. This discrepancy in the fees charged is generally attributed to the investment method used.The more actively a fund is managed, the higher the management fees charged. For example, an actively managed equity fund that turns over its portfolio several times a year in search of profit opportunities will cost much more than a passively managed fund such as an index fund that more or less sits on a basket of shares without much trading.
With a management fee of 1% per year and assets under management of CHF 500,000, the management fee corresponds to CHF 5,000 per year. The weaknesses of an asset management fee are obvious: the client pays either way, whether the asset manager is successful or not. But an appropriate asset management fee also has advantages for the client. On the one hand, it curbs the negative aspect of pure remuneration through high performance fees and encourages the asset manager to better weigh up risks against opportunities. On the other hand, it is transparent and far better than if the asset manager earns his money through retrocessions such as commissions. This means that a fixed asset management fee also helps to eliminate certain conflicts of interest. In addition, the asset manager also has an incentive to increase the assets. This is because the higher the assets under management, the higher the income from the fixed asset management fee.
Hedge fund management fees
Hedge funds charge notoriously high fees, which are controversial as performance has often lagged the market. Their fee structure is commonly referred to as “two and twenty” because it consists of a flat management fee of 2% of total asset value and a performance fee of 20% of all profits earned. Although this plan is often criticized, it has been the norm since Alfred Winslow Jones founded AW Jones & Co. in 1949, which is often considered the first hedge fund.