What is a Management Fee?

Felicia Dye

Investment managers provide services assisting others with investing. In return for these services, investment managers are compensated with management fees. These are usually calculated on a percentage basis. A management fee may be charged on individual investment accounts or group accounts such as retirement plans.

A management fee is money paid to a professional in exchange for investment services.
A management fee is money paid to a professional in exchange for investment services.

Management fees are charged when one party uses another to invest. The services included in those costs can vary. They may include advising, management, and legal services. Since the services provided by investment managers are variable, it is advisable for those considering such services to try to get the most for what they pay.

Management fees are often calculated based on a percentage of the assets invested. If a person wanted to invest $50,000 US Dollars (USD), for example, an investment firm may charge 2 percent of that amount as management fees. It is common to find that the percentage scale varies. Larger sums of money may be subjected to lower percentage management fees. The same firm that charged 2 percent for $50,000 USD may only charge 1 percent for managing a $1 million USD portfolio.

Sometimes the management fee is paid by a client directly to the person who is owed. In other instances, an investment manager may deduct the management fee from the assets at his disposal. The terms of payment should be disclosed at the beginning of the relationship.

The rates of management fees can be affected by a number of other factors. One example is the type of investment product. A management firm may charge higher rates for mutual funds than for stocks. This is often justified by the fact that some types of investments require more management efforts than others.

Investment managers generally assume the responsibility of guiding their clients to make the best choices. Sound investment advice is often only available after extensive research. Many of the investments available may be volatile and may require a great deal of monitoring. Such things are often considered when the management fee is calculated.

This does not mean that the rates charged by one investment manager will be the same as those charged by another. Even when the same services are sought, the prices can vary from one service provider to another. Investment management is an industry open to competition.

The government does not usually become directly involved in what percentage is charged for investment management. There are, however, some basic rules outlined. One of those requires that management fees should be reasonable. An investment manager is supposed to act on behalf of his clients, so he is prohibited from inciting account activity solely for the purpose of generating revenue for himself.

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