Management Fee

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rjonesx
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Definition

In the investment advisory industry, a management fee is a periodic payment that is paid by an investment fund to the fund’s investment adviser for investment and portfolio management services. Often, the fee covers not only investment advisory services, but administrative services as well. Usually, the fee is calculated as a percentage of assets under management.

Management Fee

What is a ‘Management Fee’

A management fee is a charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise for selecting stocks and managing the portfolio. It can also include other items such as investor relations expenses and the administration costs of the fund.

Explaining ‘Management Fee’

The management fee is the cost of having your assets professionally managed. The fee compensates professional money managers to select securities for a fund’s portfolio and manage it based on the fund’s investment objective. Management fee structures vary from fund to fund, but they are typically based on a percentage of assets under management (AUM). For example, a mutual fund’s management fee could be stated as 0.5% of assets under management.

Wide Disparity in Management Fees

Management fees can range from a low as 0.10% to more than 2% of AUM. This disparity in the amount of fees charged is generally attributed to the investment method used by the fund’s manager. The more actively managed a fund is, the higher the management fees that are charged. For example, an aggressive stock fund that turns over its portfolio several times a year in search of profit opportunities costs much more to manage than a more passively managed fund, such as an index fund that, more or less, sits on a basket of stocks without much trading.

Are High Management Fees Worth the Cost?

Active fund managers rely on inefficiencies and mispricing in the market to identify stocks that have the potential to outperform the market. However, the efficient markets hypothesis (EMH) has shown that stock prices fully reflect all available information and expectations, so current prices are the best approximation of a company’s intrinsic value. This would preclude anyone from exploiting mispriced stocks on a consistent basis, because price movements are largely random and driven by unforeseen events. Therefore, the EMH implies that no active investor can consistently beat the market over long periods of time except by chance. According to decades of Morningstar research, higher-cost actively managed funds do tend to underperform lower-cost passively managed funds in all categories.

Further Reading

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