Management Fee

What Is a Management Fee?

A management fee is the ongoing charge that an investment fund or managed account pays to the firm that selects and oversees its holdings. It covers the cost of research, portfolio decisions, trading administration, and the staff who run the fund. Rather than being billed as a separate invoice, it is usually deducted gradually from the fund's assets, so investors see its effect in their returns.

How It Works

Management fees are normally stated as an annual percentage of the assets being managed. The fund accrues a small portion of the charge each day, based on its current value, and the total is taken out of fund assets over the year. Because the fee is tied to asset size, the dollar amount rises when the fund grows and falls when it shrinks.

Fees are described in a fund's prospectus and annual report. In a exchange-traded fund or mutual fund, the management fee is one part of the expense ratio, which also includes administrative and other operating costs.

Example

Suppose an investor holds $10,000 in a fund that charges an annual management fee of 1 percent. Over the year, the fund would deduct about $100 for management before considering market gains or losses. The fee is paid whether the fund rises or falls, which is why it reduces returns over time.

Some managed accounts and hedge funds also use a performance fee that depends on profits, in addition to or instead of a management fee.

Why It Matters to Investors

Management fees are one of the few costs investors can compare before buying. Even small differences compound over many years, so a higher-fee fund must outperform a lower-cost alternative just to deliver the same net result. Investors often look at net asset value and total return to see how fees have affected performance. A index fund typically charges a lower management fee than an actively managed fund because it tracks a benchmark rather than relying on security selection.