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Management Fee

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.

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


Trends in park tourism: Economics, finance and management
www.tandfonline.com [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Board structure and fee-setting in the US mutual fund industryBoard structure and fee-setting in the US mutual fund industry
www.sciencedirect.com [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Incentives on Funds Management Fee and Optimized Option <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-ZQDB200508006.htm' />Incentives on Funds Management Fee and Optimized Option [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-ZQDB200508006.htm'>PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Research on Fund Management Fee Rate Design Based on the Performance <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-XTLL200401004.htm' />Research on Fund Management Fee Rate Design Based on the Performance [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-XTLL200401004.htm'>PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Do auditors care about real earnings management in their audit fee decisions?Do auditors care about real earnings management in their audit fee decisions?
www.tandfonline.com [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Positive Analysis on Management Fee of Investment FundPositive Analysis on Management Fee of Investment Fund
en.cnki.com.cn [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Bank earnings management and income smoothing using commission and fee incomeBank earnings management and income smoothing using commission and fee income
www.emerald.com [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Determinants and implications of fee changes in the hedge fund industryDeterminants and implications of fee changes in the hedge fund industry
papers.ssrn.com [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Rural Fee Reform and the Changing Relationship between State and Peasant <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-SHXJ200603001.htm' />Rural Fee Reform and the Changing Relationship between State and Peasant [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-SHXJ200603001.htm'>PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …

Corporate risk disclosure and audit fee: A text mining approachCorporate risk disclosure and audit fee: A text mining approach
www.tandfonline.com [PDF]
… Economics is an important component of societal decision-making that is, however, typically given … management budgets of the areas were A$48,700,000, and the user fee income to … Driml and Common (1995) question the ability of the existing management structure to maintain …



Q&A About Management Fee


What is cost?

Cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

What are some examples of costs?

Costs can include labor costs (e.g., wages), material costs (e.g., raw materials), overhead costs (e.g., rent) and interest expense on debt financing; opportunity costs such as travel expenses; depreciation on capital goods; and indirect taxes such as sales tax or value added tax that are passed on from suppliers to consumers through higher prices or lower margins for retailers/wholesalers/manufacturers etc.; any other expenditure required to bring about a sale including marketing expenditures like advertising or promotion; legal fees associated with obtaining permits or licenses; fines paid due to violations in regulations etc.; losses from theft by employees; losses from damage caused by employees e.g., fire damage due to employee negligence etc.; loss resulting from errors made during operations e.g., wrong billing information sent out resulting in customer dissatisfaction etc.; loss resulting from fraud committed by employees e.g., embezzlement leading to financial loss for employer etc.; any other expenditure related with running a business operation that does not generate revenue directly but contributes towards generating revenue indirectly i""

Why do active fund managers rely on inefficiencies and mispricing in the market to identify stocks that have potential to outperform the market?

Active fund managers rely on inefficiencies and mispricing in the market to identify stocks that have potential to outperform the market because they believe these opportunities will not be available forever. However, according to EMH, current prices are best approximations of intrinsic value so there should be no opportunity for excess returns over time except by chance. Therefore, 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."

How much can management fees range from?

Management fees can range from .1 to more than 2 of AUM.

What are some examples of actively managed funds?

Some examples include aggressive stock funds and index funds.

What does the amount of fees charged depend on?

The amount of fees charged depends on the method used by the funds manager.

What is a management fee?

A management fee is a charge levied by an investment manager for managing an investment fund.