Overview
This appendix will give you examples of how management fees will be calculated using the three different fee methodologies:
Client Setting/Aggregate Balance
Individual Account Setting/Balance, and
Individual Account Setting/Blended Rate.
For all of the scenarios, we will use an example client with two accounts:
a Retirement account with $100,000 and
a Brokerage account with $300,000.
We will also use the following three Management Fee Settings (Fee Tiers):
| Management Fee A | Management Fee B | Management Fee C |
| 0 - $100,000 1.00% | 0 - $100,000 2.00% | 0 - $100,000 1.50% |
| $100,001 - $250,000 50% | 0. $100,001 - $250,000 1.00% |
$100,001 - $250,000 0.75%
|
| 250,001 + 0.25% | $250,001 + 0.50% |
|
Scenario 1: How is the Client setting/Aggregate Balance fee calculated?
You can aggregate a client’s accounts and apply one management fee to the total holdings. Remember, in this scenario, the client has a total of $400,000 across two accounts.
If you decide to calculate fees at the client level, then it is simply a matter of choosing which management fee to apply to the aggregate value:
|
Fee A Applied to Aggregate |
Fee B Applied to Aggregate |
Fee C Applied to Aggregate |
| $100,000 x 1% = $1,000 | $100,000 x 2% = $2,000 |
$100,000 x 1.5% = $1,500
|
| $150,000 X 0.5% = $750 | $150,000 X 1% = $1,500 |
$150,000 X 0.75% = $1,125
|
| $150,000 X 0.25% = $375 |
$150,000 X 0.5% = $750 |
$150,000 X 0.375% = $562.50
|
| Total Fees = $2,125 |
Total Fees = $4,250 |
Total Fees = $3,187.50 |
Scenario 2: How is the Individual Account Setting/Balance fee calculated?
| Fee A Applied to the Retirement account | Fee B Applied to the Brokerage Account | |||
| $100,000 x 1% = | $1,000 | $100,000 x 2% = | $2000 | |
| $150,000 x 1% = | $1,500 | |||
| $50,000 x 0.50% = | $250 | |||
| Retirement account fee = | $1,000 | + | Brokerage account fee = | $3,750 |
| Total fees = | $4750 | |||
Scenario 3: How is the Individual Account Setting/Blended Rate fee calculated?
As in Scenario 2, each account has its own management fee: the Retirement account is assigned Fee A, while the Brokerage account is assigned Fee B; this is set at the account level. In Scenario 3, though, a blended rate is calculated for multiple accounts. With a blended rate, the fee for an account is based on that account’s contribution to the client’s aggregate total. In other words, the accounts are first blended together in order to calculate an initial fee, then billed separately based on their proportion to this value.
The process is as follows:
Aggregate the value of the client’s accounts. In this case, it is $400,000.
Determine the fees for each account based on the aggregate value and the management fee assigned to each account. (Fee A for the Retirement account, Fee B for the Brokerage account)
Determine the weighting of each account compared to the aggregate value all accounts.
Multiply the value of each weighting by the fees owed from each corresponding account (from step 2).
Sum the newly weighted fee values for the total fees owed by the client.
With this method, the client takes advantage of aggregating, and the advisor is fairly compensated based on the size of the accounts. An example follows below.
Step 1 from the process above gives the aggregated balance as $400,000.
In Step 2, this value is then entered into both fee tiers (Fee A, as applied to the Retirement account and Fee B, as applied to the Brokerage account):
| Fee A Applied to Aggregate Value | Fee B Applied to Aggregate Value | ||
| $100,000 x 1% = | $1,000 | $100,000 x 2% = | $2,000 |
| $150,000 X 0.5% = | $750 | $150,000 X 1% = | $1,500 |
| $150,000 X 0.25% = | $375 | $150,000 X 0.5% = | $750 |
| Total Fees = | $2,125 | Total Fees = | $3,750 |
Instead of simply adding these two fees together, though, we move onto Step 3 from the process with the following calculation:
|
A + B + C |
Where:
A = Value of assets in an account
B = Aggregate Value of accounts
C = Weight of an account towards the corresponding aggregate client fee
In the case of the Retirement account, this is calculated as:
|
100,000 \ 400000 = 0.25 |
Therefore, the Retirement account is responsible for 25% of Fee A. And for the Brokerage account, the weighting for Step 3 is calculated as:
|
300000 / 400000 + 0.75 |
So the Brokerage account is responsible for 75% of Fee B.
Step 4 from the process above is calculated as:
|
C X D = E |
Where:
C = Weight of an account towards the corresponding aggregate client fee
D = Management fee owed by an account (taken from Step 2)
E = Weighted fee for an account
In this case, for the Retirement account, the weighted fee is calculated as:
|
0.25 x 2125 = 531.25 |
And the weighted fee for the Brokerage account is calculated as:
|
0.75 x 3750 = 2812.50 |
Therefore, the sum for Step 5 in the process above is:
|
531.25 + 2812.50 = 3343.75 |