Management Fees (2024)

Fees paid to professionals entrusted with managing investments on a client’s behalf

Written byCFI Team

What are Management Fees?

Management fees are fees paid to professionals entrusted with managing investments on a client’s behalf. Typically determined as a percentage of the total assets under management (AUM), management fees can cover a variety of expenses, including portfolio management, advisory services, and administrative costs.

Management Fees (1)

Management fees are present in almost all investment management and advisory services, but the actual rate can vary significantly. Like any other service fee, management fees are paid to investment professionals in return for their services. The services can be in the form of advice, expertise, and, hopefully, a high return on your investment.

Summary

  • Management fees are fees paid to professionals entrusted with managing investments on a client’s behalf.
  • Typical management fees are taken as a percentage of the total assets under management (AUM).
  • Management fees can also be referred to as investment fees or advisory fees.

Understanding Management Fees

In the investment management industry, management fees are the norm among all types of investment opportunities. In exchange for paying management fees, investors are provided with access to the expertise and resources of investment professionals. The professionals can help investors with allocating risk, rebalancing portfolios, or providing personalized investment advice.

Management fees can also cover expenses involved with managing a portfolio, such as fund operations and administrative costs. The management fee varies but usually ranges anywhere from 0.20% to 2.00%, depending on factors such as management style and size of the investment.

Investment firms that are more passive with their investments generally charge a lower fee relative to those that manage their investments more actively. Also, institutional investors or high-net-worth individuals with large sums of money to invest are sometimes eligible to receive a lower management fee. Management fees can also be referred to as investment fees or advisory fees.

Typical management fees are taken as a percentage of the total assets under management (AUM). The amount is quoted annually and usually applied on a monthly or quarterly basis. For example, if you’ve invested $10,000 with an annual management fee of 2.00%, you would expect to pay a fee of $200 per year. If management fees are applied every quarter, you would expect to pay a fee of $50 every three months.

Management Fees (2)

Avoiding Management Fees

For those who want to avoid management fees and keep more of their money, it’s possible to avoid management fees altogether by engaging in self-directed investing. Self-directed investing allows investors to take complete control of their investments, cutting out the need for investment professionals. It can involve buying and selling individual stocks, as well as building a personalized investment portfolio.

Although no management fees are involved, it can be a risky option for inexperienced investors. Also, self-directed investors should be wary of other expenses, such as commissions, brokerage fees, and currency exchange fees.

Management Fee vs. MER

Another term that commonly arises when discussing management fees is the management expense ratio (MER). Recall that management fees are paid to the investment professionals that manage the investments and can cover other expenses, such as fund operations and administration.

On the other hand, the MER includes the management fee, as well as other costs associated with running an investment fund. It can include operating expenses, such as accounting, valuation, legal fees, and taxes.

Therefore, when making investment decisions, it’s important to consider not only the management fee but the entirety of the MER. Generally expressed as a percentage, the MER is often higher than the management fee, as it encompasses the management fee and other operating expenses.

Management Expense Ratio (MER) = Management Fees + Operating Expenses + Taxes

Management Fee Example

A simple management fee is applied as a percentage of the total assets under management. Suppose you’re planning to invest $100,000, and an investment firm offers you an investment opportunity with a management fee of 0.45% per year. In this case, you would be charged $450 a year in management fees.

Now, suppose another investment firm offers you an investment opportunity with a lower management fee of 0.25%, with an additional operating expense of 1.25%. In this case, the MER of the fund would be 1.50%, and you would expect to be charged a fee of $1,500 per year.

Ideally, your investments should achieve an annual return greater than the MER. It ensures that you can cover any fees involved with the investment opportunity while still earning a profit on your investments.

Related Readings

Thank you for reading CFI’s guide on Management Fees. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

Management Fees (2024)

FAQs

Management Fees? ›

Management fees are fees paid to professionals entrusted with managing investments on a client's behalf. Typically determined as a percentage of the total assets under management (AUM), management fees can cover a variety of expenses, including portfolio management, advisory services, and administrative costs.

What is a reasonable management fee? ›

The management fees may or may not cover not only the cost of paying the managers but also the costs of investor relations and any administrative costs. Fee structures are usually based on a percentage of assets under management (AUM). Fees tend to range from 0.10% to more than 2% of AUM.

What expense is management fee? ›

This fee is specifically for asset management services and does not include other expenses related to the fund. Typically, it's calculated as a percentage of the fund's average assets under management (AUM). For example, a fund with a 1% management fee will charge $1,000 annually for every $100,000 of AUM.

What are the three types of management fees? ›

Investment management fees are the charges associated with having someone manage your investments. The three most common fee structures are flat, asset-based, and wrap fees.

What is considered a high management fee? ›

A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days.

What is the 2% management fee? ›

The 2 and 20 fee structure helps hedge funds finance their operations. The 2% flat rate charged on total assets under management (AUM) is used to pay staff salaries, administrative and office expenses, and other operational expenses.

Are management fees negotiable? ›

If a property management company has a maintenance crew, you may be able to negotiate; if they go with an outside company, it might be impossible. Some costs, like leasing or placement fees, are ordinary in property management, and many of them are amenable to negotiation.

What is a typical management fee for a money manager? ›

Most financial advisors charge based on how much money they manage for you. That fee can range from 0.25% to 1% per year. Some financial advisors charge a flat hourly or annual fee instead.

What is considered a high mer? ›

Investors should avoid mutual funds that charge 2% MER or more. A good MER starts around 1.25%, but a great MER is less than 1%. The best example is TD's e-Series funds where the average MER is around 0.40%.

How do you calculate management expenses? ›

The MER is expressed as a percentage of the average dollar amount of a fund investment. For example if an investor holds assets of $10,000 and the fund incurs annual costs of $78, the MER is 0.78%.

What is the average management fee for private equity firms? ›

Private equity firms normally charge annual management fees of around 2% of the committed capital of the fund.

Is a management fee an operating expense? ›

The largest component of a fund's total operating expenses usually is its management fee, an ongoing charge paid to an invest- ment adviser who manages the fund's assets and selects its portfolio of securities.

What are the 2 categories of fees? ›

Fees typically come in two types—transaction fees and ongoing fees. Transaction fees are charged each time you enter into a transaction, for example, when you buy a stock or mutual fund. In contrast, ongoing fees or expenses are charges you incur regularly, such as an annual account maintenance fee.

Is 2% fee high for a financial advisor? ›

Most of my research has shown people saying about 1% is normal. Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.

What is a management fee for a company? ›

Definition for : Management fee

A periodic fee paid by a Subsidiary to its mother company to remunerate some services like strategic, financial, accounting, legal or more generally management assistance.

What is a management charge between companies? ›

A management charge (also known as a service charge, or a recharge) is made to compensate company 1 for the use of its resources – e.g. staff - by a connected company, company 2.

How is the management fee typically calculated in a rental property? ›

Most property management companies charge a monthly fee of between 8% – 12% of the monthly rent collected. If the rent on your home is $1,200 per month the property management fee would be $120 based on an average fee of 10%.

What is the 2 and 20 fee? ›

"Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.

What is a .04 expense ratio? ›

The expense ratio is how much you pay a mutual fund or ETF per year, expressed as a percent of your investments. So, if you have $5,000 invested in an ETF with an expense ratio of . 04%, you'll pay the fund $2 annually. An expense ratio is determined by dividing a fund's operating expenses by its net assets.

References

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