Management fee

A recurring charge for running an investment, usually quoted as a percentage of the assets held and taken every year regardless of the result.

Example

A 1.50% management fee on a 200,000 balance takes 3,000 in a year whether the balance rose or fell.

Important

It is charged on the balance, not on the gain, so a flat or losing year still costs the full amount - the opposite of how most people picture paying for performance.

Related terms

• Fee drag — The compounding cost of fees over time, which is far larger than the fee's annual percentage suggests on its own.
• Expense ratio — The annual fee a fund charges, expressed as a percentage of the money you have in it.
• Performance fee — A share of the gain paid to a manager, often only above an agreed threshold. Also called an incentive fee or, in private funds, carried interest.

Lessons that explain it

• A fund must return far more than its investments cost to deliver its target to investors — Fees, carried interest and reserves mean a venture fund's portfolio must earn a much higher gross multiple than the net multiple its investors receive. Working backwards shows what a fund needs from its best companies. (12 min)
• Add up the fees for all ten years before you compare two funds — Management fees are usually quoted as an annual percentage, but what matters is the total over the fund's life, and whether the fee is charged on committed or invested capital. (10 min)
• A syndicate lets you back one deal alongside a lead, and charges carry on that one deal — Syndicates pool individual investors into a single-purpose vehicle to invest in one company alongside a lead investor. They lower minimums and provide access, while charging carry and fees on each deal. (12 min)
• Ask how the manager gets rich, and whether it requires you to — Fund economics shape manager behaviour. Alignment is strongest when managers commit meaningful personal capital, depend on carry rather than fees, and keep fund sizes suited to their strategy. (10 min)
• Access and diversification, bought with a second layer of fees — Funds of funds and investment platforms give individuals access to managers and diversification they could not reach directly, in exchange for fees charged on top of the underlying funds' own fees. (11 min)
• Interest minus expected losses minus fees — A lending return is the interest collected, less the share of principal lost to defaults after recoveries, less fees. Expected loss is the number the headline rate leaves out. (12 min)

All 578 terms in the Investing glossary