You can now charge fees based on portfolio performance. To create a performance based management fee setting, do the following:
In the Management Fee Wizard, click the Billing Method drop-down and select Performance Based Fee.
Enter payment period and scheduling preferences (same format as tiered/flat fee structures).
Enter a Billing Rate, Performance Base (optional) and Annual Minimum Fee.
Billing Rate (%): This is the percentage of the portfolio’s total investment gain (expressed as total dollar value) that will constitute the management fee amount for the period.
The total investment gain for the billing period is given by the following formula:
Performance Base (%): This is an optional performance threshold that limits the management fee calculated. The performance based fee charged will reflect only the investment gain amount above the performance base.
Annual Minimum Fee: If the performance based fee calculated does not exceed the Annual Minimum Fee specified, the Annual Minimum fee will be charged.
Click Save + Close.
The performance based management fee will be based on the following formula:
Illustration
Jane Advisor applies a performance-based management fee to a client’s account for Q4 2010. Over the course of the quarter, the client’s portfolio has grown from $100,000 to $105,000 (with no additional cash flow), a gain of $5,000, or 5% of the portfolio’s original value. Jane applies a billing rate of 10%.
If Jane does not set a Performance Base, her management fee for the quarter will be 10% of $5,000, or $500.
If Jane chooses to apply a Performance Base, her management fee will only be charged to the period gain that surpassed the Performance Base she enters. For example, suppose Jane applies a Performance Base of 2%. Although the portfolio gained 5% this quarter, Jane will only charge her client on the portion of the gain above her 2% threshold, or the remaining 3% gain. Her management fee for the quarter will be 10% of $3,000, or $300.