Investment management fees
You are an investor, Harry! But if you doubt your ability to invest, then you can always turn to Dumbledore or the specialist who will control assets on your behalf, but you will have to pay the investment management fee. In most cases, typical fees for investment management are based on a percentage of assets under management (AUM). In general, you pay for portfolio management, consulting, and various administrative expenses. You name the total price yearly, there is the choice of the payment time – every month or every quarter. So, you’ve invested 1000 galleons, the annual commission is 1% or 10 galleons.
Of course, you are able to completely control investments by yourself (cause you’re the boy who lived!), it will save some money, but if you have little experience, then it might be risky. And also there are other expenses: commissions, brokerage payments, and currency exchange commissions (and don’t forget about the uniform, the books, the wand, the owl, and other equipment).
There is another term that you should know – the Total Management Expense Ratio (not THE Ratio), or TER. It includes all expenses related to the operation of the investment fund, for example, accounting, legal payments, taxes. Please note: when making any investment decisions, you need to take into account both the MF and the TER.
The disparity in Management Fees
The average management fee can range from 0.10% to over 2% of AUM. This can be explained by the investment method used by the fund’s manager. The more actively the fund is controlled, the higher the payment is. Sounds logical, like leviOsa and not leviosA.
But there is no guarantee that actively managed funds will perform better than passively ones, and sometimes they have worse returns.
Calculating management fees
As you already understood, the payment is a percentage of the total AUM. So, let’s calculate management fees. You’re ready to invest 1 000 000 galleons (that’s impressive). The first advisor, called Ron, suggests you work with him with an asset management fee of 0.50% per year. It means you need to pay 5000 galleons a year in the payment. And the second advisor, Hermione, offers you a lower fund manager commission of 0.30%, but there are some additional expenses of 1.30%. In this case, the TER would be 1.60%, and you should pay a commission of 16 000 galleons per year.
It would be perfect if your investments brought in more annual income than the TER. This would ensure that you’re able to pay any commissions and still make a profit on the investment.
The MF calculation greatly affects your long-term savings goals. Even a small difference in percentage can make a big difference. To predict what will happen to your money in the future, use our ISA calculator.
Frequently Asked Questions about management fee
Ask us about MFs in the chat of our share trading app in the UK, but for now, we answer only a couple of questions.
What is the average management fee for a mutual fund?
It depends on the type of financial services you want to use. Typically, financial and investment MF includes wealth MFs, asset MFs, financial MFs, and more. Also, the structure of MF payment might be different for each financial advisory firm, so when you search, you may find that the first firm charges a percentage of the assets under control, other charges a flat rate, and the third one charges a combination of both.
What is a 2 and 20 management fee structure?
2 is for the standard management fee percentage of 2% of assets per year, and 20 is for the incentive commission of 20% of profits of more than the hurdle rate.
This remuneration scheme is beneficial (it is also called ‘success fee’), but has recently come under close scrutiny by investors and politicians as it has made many hedge fund managers multi-millionaires and billionaires.
Is a 1% Management fee high?
The typical fund management fees for most consultants and brokerage firms charge are much more than 1% commission per year. As a rule, for small accounts, a higher commission is paid (1.75%), but if your portfolio is more than 1,000,000 galleons and you pay assets under management fees of more than 1%, then you better get additional services. It may include comprehensive financial planning, tax planning, etc.
Is it worth paying a financial advisor 1%?
If you already have a consultant, then think about whether he helped you, and then you will immediately understand whether he is worthy of a 1% commission or a monthly management fee. Suppose he helped you get a large percentage of income from your portfolio for a couple of years in a row, then a 1% portfolio management fee is very beneficial for you.
It’s harder to understand if you don’t have an advisor yet. Then just check who he worked with and his reputation and ensure the advisor is authorised by the regulator.
Before hiring an advisor, think about your goals. Sometimes, for a start, you may take an ‘electronic advisor’ (a robo-advisor), and after a while, when your goals change, move from a robo to a real-advisor.
By itself, the size of the commission for asset controlling is only about half of the case. It is important how much money the fund brought and will bring. It may charge high-interest rates for controlling, but be aimed at high-risk trading and successfully generate good income that will not only cover the costs. There are, for example, bond ETFs that charge just pennies for controlling, but they are initially aimed at conservative investments that generate low stable returns.
Therefore, it is important to know answers to these questions:
- How much does it cost to give money under management?
- What profitability is the fund focused on and what does it do at all?
- What are the risks?
- Can you afford them?
If you think about your next investment move, check out our investment collections.