Management Fee definition

what is a management fee

The term ‘management fee’ usually refers to investment management fees that are charged by investment managers. Here, we look at the definition in more detail and go over the role of an investment manager.

Investment Management Fees

An investment management fee is the money paid by an investor to an investment manager or management company for handling their investments. In other words, investors must pay a fee in order to have their finances professionally managed. Investment managers might be hired by banks, investment and asset management companies, insurance and life assurance companies, stockbrokers, unit trusts, hotels, resorts and offshore companies.

In a broader sense, a management fee could be paid to someone who manages a business, property or sum of money on behalf of someone else.

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What do the fees go towards?

The fees are designed to remunerate investment management professionals for their time spent identifying stocks and handling an investment portfolio, as well as the use of their accumulated knowledge and industry experience.

Sometimes the fees also include additional fees, such as investor relations expenses and investment fund administration costs.

Investment Management Fee Percentages

Investment management fees are usually calculated as a fixed percentage of the revenue generated by the investment fund that is being managed. They are paid on a monthly, quarterly and annual basis, as many investment managers work for their clients over a long time period.

The exact percentage depends on the fund, but they normally reflect the assets under management (AUM); for example, an investment management fee might be expressed as 0.7 percent of AUM. However, this percentage can vary, from around 0.1 percent up to 2 percent of AUM.

The fee also depends upon how much work the investment manager puts into the fund. In other words, the fees increase the more a fund is ‘managed’. The fees of an investment manager that regularly reviews a portfolio and makes alterations in order to increase profits will be higher than those of an investment manager that doesn’t have as much involvement in a fund.

Active vs Passive Investment Managers

Active investment managers seek out inconsistencies and anomalies in the market in order to find stocks that will perform better than their price suggests they will. They then alert their client to these lucrative investment opportunities. However, it is difficult to beat the market time after time and research has demonstrated that expensive actively managed funds are often less profitable than lower-cost passively managed funds (Morningstar). That’s because, to beat the market by just 1 percent, active fund managers would need to generate an excess return of over 2 percent just to cover the average 1.19 percent management fee (Investopedia and William Sharpe).

Investment managers stand to make thousands. For example, if a client is charged a fee of 1 percent of £3 million in assets, they will pay £30,000 in investment management fees every year. This can be a highly lucrative career, but if a fund isn’t creating a significant return, investment managers sometimes waive the fee altogether.

What do investment managers do?

At this point, you may be asking: But what do investment managers actually do? Well, they carry out research into the market in order to help both private and corporate investors manage their finances. In reality, they’re not the ones carrying out in-depth research – this is left to investment analysts. Investment managers work with investment analysts and use their findings to make informed decisions about client investments. They predict the projected performance of specific economic sectors and assess the level of risk involved with certain schemes and purchases. They then advise clients as to the best course of action so that they invest their money in the right places.

In terms of day-to-day activities, investment managers might meet with clients, read financial briefings written by investment analysts; research companies, read financial news and interpret this information; and gather data from a range of sources to create a digestible report for later reference.

Franchise Service Management Fee

Franchises also involve the payment of fees, but these are a little different. There are three main types of fees paid by a franchisee to the franchisor. Let’s take a look at them in more detail:

The first type of fee is the initial fee, which covers the cost of the franchisor granting the franchise, including territory analysis, site selection, recruitment, training and any specialist equipment.

The second is an advertising or marketing fee, which enables the franchisor to carry out regional, national or international marketing campaigns in order to boost brand awareness and, in theory, the profitability of the business as a whole. This fee usually sits at about 2 percent of sales income, although it can range from 1 percent all the way up to 5 percent.

The final fee is the management service fee – also known as the service fee, franchise fee, licence fee, continuing fee or royalties. This is the price of the ongoing services provided by the franchisor to the franchisee, i.e. the cost of monitoring the performance of the franchise, carrying out market research, developing the franchise and its franchisees, and holding regular meetings.

The management service fee is usually between 4 and 6 percent of sales income, but it can be as low as 1 percent, or as high as 50 percent. This is, of course, if it is calculated as a percentage-based fee. Alternatively, franchisees could be faced with a fixed fee. In this case, the franchisee pays the same amount throughout the franchise agreement period, regardless of the franchise’s revenue. This can prove difficult in the first few months of a franchise’s life and during economic downturns, as the franchisee will be forced to pay a higher proportion of their income than they would if the franchise was more successful, which can make it even more difficult to generate a profit.

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