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Investment Management Fee Structures (Published by the CFA Institute)

Investment Management Fee Structures (Published by the CFA Institute)

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Overview of some of the problems with current institutional fee structures. Among the biggest problems: the most common fee structures do not take into account how well or how badly the investment manager handled risk. Yet, much of the industry seems to be highly focused on the protection of capital. Also present a novel fee structure in the context of managing a fund of managed accounts.
Overview of some of the problems with current institutional fee structures. Among the biggest problems: the most common fee structures do not take into account how well or how badly the investment manager handled risk. Yet, much of the industry seems to be highly focused on the protection of capital. Also present a novel fee structure in the context of managing a fund of managed accounts.

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Categories:Types, Research
Published by: Stefan Whitwell, CFA, CIPM on May 29, 2013
Copyright:Attribution Non-commercial

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04/27/2014

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NBWIXTKIBT \NXM @BD QI\GJ\K@BHI
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Nbvistkibt K`b`oikibt Gii Xtruhturis
Nb cnoft jg sj kuhf sjpfnstnh`tnjb nb tfi nbvistkibt k`b`oikibt lusnbiss tjd`y# nt ns sjkiwf`t surprnsnbo fjw hrudi `bd pjjrcy gubhtnjbnbo tfi `ri` jg gii struhturirik`nbs" ^it# gii struhturi dihnsnjbs `ri vnt`c lih`usi tfiy dnriht tfi lif`vnjr `bd nbhibtnvis jg tfi nbvistkibt k`b`oir `bd dicnbi`ti wf`t tf`t k`b`oir biids tj djtj oit p`nd—`b `ri` tf`t nbvistkibt k`b`oirs `bd tfinr st`gg f`vi ` miib nbtirist nb"Nb tfns `rtnhci# Kr" _fntwicc sukk`rnzis tfi hfnig prjlciks wntf ixnstnbo gii struh+turis `bd prisibts `b nbbjv`tnvi `bd tfjuoft+prjvjmnbo ix`kpci jg `b `ctirb`tnvi`pprj`hf nb tfi hjbtixt jg kuctnk`b`oir pjrtgjcnjs"
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fi nbvistkibt k`b`oikibt lusnbiss tjd`y nsccid wntf kjdirb `dv`bhis# suhf `s sjpfnstn+h`tid `ttrnlutnjb `b`cysns `bd tfi nbvibtnjb j  v`rnjus kjdics jr prnhnbo jptnjbs `bd hustjk+k`didirnv`tnvis" Xj# nt ns sjkiwf`t surprnsnbo# onvib tfi hjc+cihtnvi fuk`b nbticciht nb tfi nbvistkibt k`b`oikibtlusnbiss# eust fjw hrudi tfi ii struhturi sndi j tfilusnbiss rik`nbs" Gii struhturi dihnsnjbs `ri vnt`c lih`usitfiy dnriht tfi lif`vnjr `bd nbhibtnvis j tfi nbvistkibtk`b`oir `bd dicnbi`ti wf`t tf`t k`b`oir kust dj tj oitp`nd= `bd wi wjucd `cc `orii tf`t nbvistkibt k`b`oirs`bd tfinr st` f`vi ` miib nbtirist nb oittnbo p`nd" @s tfns `rtnhci dikjbstr`tis# tfiri `ri tfrii ikpnr+nh`c dnkibsnjbs tj `b`cyznbo iis5 &0. bjknb`c riturbs#&<. rnsm+`deustid riturbs &jr pirf`ps jbcy –rnsm‛.# `bd&8. `ddid v`cui" Ti rst dnkibsnjb# bjknb`c riturbs# ns snkpci `bd wicc hjbviyid wfib nbvistjrs `sm tfi sfjrt lut pjnob`btquistnjb5 –Dnd yju k`mi us kjbiy jr bjt:‛ Tns quis+tnjb# fjwivir# h`b sjkitnkis li jvircjjmid nb `b nbdus+try tf`t f`s bi`rcy pirihtid tfi `rt j k`mnbo nbvistjrsiic ojjd `ljut cjsnbo5 –@ctfjuof jur riturb w`s ‘01)#jur libhfk`rm# tfi X'Q 911 Nbdix# w`s djwb <1)# sj`htu`ccy yju dnd `bt`stnh= wi ficpid yju jutpirjrkly 0#111 lps!‛ _ntf ububdid cn`lncntnis `kjbo pib+snjb ubds orjwnbo nb ri`c tirks# fjwivir &wi `cc mbjw tf`t tfi jhn`c `bd wrnttib `hmbjwcidokibt c`os hjb+sndir`lcy.# lj`rds# hfni nbvistkibt jhirs &HNJs.# `bdpjrtjcnj k`b`oirs `ri dihndidcy jhusnbo jb `lsjcutiriturbs" Tns jhus ixpc`nbs# nbhndibt`ccy# tfi lnrtf `bdhjbtnbuid orjwtf j tfi –`lsjcuti riturb sihtjr#‛ jtfir+ wnsi mbjwb `s –`ctirb`tnvi nbvistkibts"‛Biidciss tj s`y# N dj bjt mbjw k`by lj`rds# HNJs#jr nbvistjrs wfj ibejy p`ynbo iis wfib cjsnbo h`pnt`c" @t tfi s`ki tnki# rubbnbo `by prjissnjb`c nbvistkibtprjor`k f`s ` hjst# `bd lj`rds# HNJs# `bd nbvistjrs`hmbjwcidoi tfns `ht" L`c`bhnbo tfisi twj jppjsnbojrhis h`b h`usi tibsnjbs nb tfi hjbtixt j ii dnshus+snjbs" @bd sj `r# tfi tibdibhy j lj`rds# hjbsuct`bts#`bd nbvistjrs f`s liib tj `ttikpt tj ricnivi tfinr `bxnity surrjubdnbo p`ynbo iis durnbo cjss pirnjds ly jrhnbonbvistkibt k`b`oirs tj `orii tj cjwir iis" @ctfjuoftfns `pprj`hf k`y siik r`tnjb`c# N rio`rd suhf –ii li`t+nbos‛ `s pjjr `ctirb`tnvis tj hri`tnbo nbhibtnvi struhturistf`t riw`rd tfi lif`vnjr nbvistjrs w`bt `bd biid" Nbvis+tjrs w`bt tfinr nbvistkibt k`b`oirs tj li ivib kjrikjtnv`tid tj hri`ti tfi juthjki tfiy biid" N ` hcnibtli`ts djwb `b nbvistkibt k`b`oir jb iis# tfib tfikjst cnmicy hjbsiquibhi wncc li tf`t jvir tnki# nb `bijrt tj k`xnknzi prjt# tfi k`b`oir wncc st`rt riduhnboixpibsis# ci`dnbo tj ` cjwir+qu`cnty st` `bd uctnk`ticy tj ` cjwir v`cui+`ddid prjduht" Tisi hf`bois riduhinbbjv`tnjb `bd nbhri`si rnsm# `bd tfns rnsm ns dnhuct tjki`suri ubtnc nt ns tjj c`ti" Ti kuctnk`b`oir sp`hi jirs ` ori`t nccustr`tnjb j tfns shib`rnj" @ c`roi buklir j ubds j ubds &GJGs.f`vi liib ubdirpirjrknbo tfinr prjknsi &prjkns+nbo `cpf` `bd dicnvirnbo lit`." Jbi knoft ixpiht tj sii
ly XTIG@B _FNT_ICC# HG@# HNQK
 
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k`b`oirs ix`knbnbo tfi ri`sjbs wfy `bd ibonbiirnbobiw sjcutnjbs tf`t knoft oibir`ti kjri `cpf`" Nbsti`d# wi f`vi siib ` sti`dy nbhri`si nb ii li`tnbos `bd cjwir v`cui+`ddid `rr`boikibts tf`t stncc p`ss kustir `t tfilj`rd civic lih`usi tfi nbvistkibt k`b`oikibt jro`bn+z`tnjb jirnbo tfisi sirvnhis ns fuoi# f`s ` ojjd b`ki#`bd ns prisukid tj li iqu`ccy kjtnv`tid pjst‘biw ii"Nb ky vniw# fjwivir# tfns nbdustry `pprj`hf ns jbcy jrh+nbo kjst GJGs tj tr`bsjrk nbtj nbdix ubds tf`t prj+ vndi lit`—`bd jbi hjucd `roui tf`t GJG ynicds wnccprjvi tj li kjri hjrric`tid tfi kjri lit`+jrnibtid tfiy lihjki" F`vnbo nbixpibsnvi `ctirb`tnvi+sihtjr nbdixubds &GJGs. ns fi`ctfy jr tfi nbdustry# `bd onvib tf`tkjst GJG prjor`ks f`vi issibtn`ccy prjduhid lit` rjktfi lionbbnbo &dispnti prjknsis j `cpf`.# tfi ii li`t+djwbs `ri bjt nrr`tnjb`c" j hjbhcudi tf`t kuctnk`b`oirstr`tionis `ri
npsj g`htj
lit` vifnhcis# fjwivir# ns ` fuoiknssid jppjrtubnty jr pibsnjb ubds `bd jtfir nbvistjrstf`t biid `cc tfi `cpf` `bd ubhjrric`tid nbhjki tfiy h`boit" Kuctnk`b`oir pjrtjcnjs# n hjbstruhtid hjrrihtcy `bd wntf `cpf` ibonbiirnbo prnbhnpcis nb knbd# h`b nbdiid liricn`lci sjurhis j fnof+qu`cnty `cpf`" @bd wi prjpjsitf`t tfi iis jr suhf vifnhcis li prnhid `hhjrdnbo tj tfi`cpf` tfiy hri`ti# bjt tfinr prisukid –lit`‛ st`ti" Ti sihjbd dnkibsnjb j tfi ii struhturi puzzci nsrnsm" Gjr yi`rs# nbvistkibt k`b`oirs f`vi k`di tfi h`sitj pjtibtn`c nbvistjrs tf`t pirjrk`bhi iis –`cnob‛ nbvis+tjrs„ `bd k`b`oirs„ nbtirists lih`usi tfi ubd k`b`oiri`rbs ` pirjrk`bhi ii jbcy n tfi ubd prjduhis biw o`nbs" Tns hc`nk ns ljtf trui `bd nbtibtnjb`ccy knsci`d+nbo lih`usi tfi nbtirists j tfi nbvistjr `bd ubd k`b+`oir `ri `cnobid nb jbcy jbi dnrihtnjb" N tfi nbvistkibtcjsis kjbiy# tfi nbvistjr `cjbi suirs tfi cjss j h`pnt`c" _jrsi yit# tfi kjst hjkkjb <*<1 ii struhturi djis bjtt`mi rnsm nbtj `hhjubt" j drnvi tfns pjnbt fjki# hjbsndirtfi jccjwnbo shib`rnj"Nbvistjr @ nbvists nb Qrjor`k @# t`roitnbo ` 01)`bbu`c riturb nb i`rcy E`bu`ry" Jb 0 Eucy# Qrjor`k @pcubois nb v`cui# djwb <1)# lut rihjvirs jb tfi l`hm j `sf`rp c`ti Dihiklir r`ccy tf`t risucts nb ` 01) riturb jrtfi yi`r" Nbvistjr @ ns bjt –f`ppy‛—ricnivid# pirf`ps"Nbvistjr @ spibt tfi ibtnri yi`r djultnbo fir dihnsnjb tjnbvist# hjbhirbid `ljut tfi cjss j h`pnt`c# `bd wjrrynbo`ljut tfi cnmicnfjjd j urtfir cjssis" Nb hjbtr`st# Nbvis+tjr L `csj i`rbid 01) tf`t yi`r rjk Qrjor`k L# wfnhf w`s st`lci `bd bivir f`d ` dr`wdjwb ori`tir tf`b 9)"Grjk tfi `rlntr`ry v`bt`oi pjnbt j tfi h`cibd`r yi`r#ljtf nbvistkibt prjor`ks f`d tfi s`ki bjknb`c riturbslut r`dnh`ccy dniribt rnsm prjcis"Xfjucd tfi twj nbvistkibt k`b`oirs nb tfi shib`rnj eust dishrnlid li p`nd tfi s`ki: Dnd tfiy iqu`ccy prjtihth`pnt`c durnbo tfi nbvistkibt tnki pirnjd: Bj# tfiy dndbjt" ^it# ` <*<1 ii struhturi riw`rds tfi k`b`oirs j Qrjor`k @ `bd Qrjor`k L wntf bi`rcy ndibtnh`c iis"
0
  _f`t cjonh h`b pjssnlcy suppjrt tfns systik:Gjr hjbsukirs# nt ns r`tnjb`c tj p`y ` fnofir prnhi jr` s`ir prjduht" Tns `ht ns jbi ri`sjb wfy Kirhidis `bdLK_ `dvirtnsikibts jtib tjut tfi fnofcy ibonbiirids`ity i`turis j tfinr biw kjdics"Nt ns `csj ` `ht tf`t durnbo pirnjds j cjss# nbvistjrs djbjt cnmi p`ynbo k`b`oikibt iis lih`usi tfjsi iis urtfirirjdi tfinr h`pnt`c l`si" _f`t n tfiri wiri ` ii struhturitf`t `ccjwid ubd k`b`oirs tj rihjup tfinr hjst lut tf`ttri`tid tfi nbvistjr kjri `nrcy ly `deustnbo tfi tnknbo sjtf`t nbvistkibt k`b`oirs wiri bjt hjknbo jut j pjhmitdurnbo pirnjds j bio`tnvi riturbs jr ubdirpirjrk`bhi: Ti tfnrd dnkibsnjb# `s Hf`rcis D" Iccns# HG@# sj`rtnhuc`ticy pjnbts jut nb fns rihibt `rtnhci –Kurdir jbtfi Jrnibt Ixpriss#‛
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ns `ddid v`cui" Ti y`rdstnhm ly wfnhf tj iv`cu`ti `ddid v`cuins tfi diorii tj wfnhf riturbs li`t tfinr libhfk`rm# wntf tfi ndi` linbo tf`t nt ns jptnk`c tj p`y `htnvi k`b+`oikibt‘typi iis jr tfi `ddid v`cui pjrtnjb j tfiriturbs &`cpf`. `bd p`y nbdix ubd‘typi ii civics jrtfi nbdix riturbs &lit`." Nb pr`htnhi# fjwivir# `ssit `ccj+h`tjrs `ri ouncty j rjutnbicy hjkknttnbo twj typis j hjstcy knst`mis" Gnrst# tfiy jtib p`y `cpf` ii civics jbljtf `cpf` `bd lit`" Xihjbd# pibsnjb ubds `ri vucbir+`lci tj knssnbo jut jb kjri v`cui+`ddid nbvistkibtjppjrtubntnis lih`usi suhf jppjrtubntnis# qunti r`tnj+b`ccy# jtib hjki wntf ` fnofir prnhi t`o" Gjr tf`t ri`+sjb# –tfi systik‛ wiids tfik jut l`sid jb tfi knst`mibcjonh tf`t tfi iis `ri tjj fnof &nb bjknb`c tirks.# wfib nb `ht# tfi iis sfjucd f`vi liib iv`cu`tid `cjbo`cc tfrii dnkibsnjbs"Xndistippnbo tfi ki`surikibt j `ddid v`cui jr `kjkibt# wi riturb tj ` priknsi hntid i`rcnir nb tfns `rtn+hci5 tf`t nt ns r`tnjb`c tj p`y kjri jr ` fnofir qu`cnty jrkjri disnr`lci i`rbnbos stri`k" Tns hjbhipt ns nkpjr+t`bt jr nbvistjrs tj miip nb knbd# `bd ` usiuc ix`kpci`rnsis nb tfi hjbtixt j kuctnk`b`oir prjor`ks"
 
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8
Nb tfi h`si j kuctnk`b`oir prjor`ks# tfi quistnjb`rnsis rjk nbvistjrs5 –_fy sfjucd wi p`y twj c`yirsj iis:‛ Tns ns ` cjonh`c lut f`c+lr`nbid quistnjb" Tijpir`tnvi quistnjb sfjucd ri`ccy li5 –Fjw kuhf v`cui`ri yju `ddnbo:‛ jccjwid ly# –_i wncc oc`dcy p`y yjukjri# tfi kjri v`cui yju hri`ti jr us"‛Hjbsndir tfi Biw ^jrm Qfncf`rkjbnh# wfnhf fnris` hjbduhtjr ivib tfjuof nt `cri`dy p`ys tfi s`c`rnis j kjri tf`b 011 wjrcd+hc`ss kusnhn`bs `bd suppjrt st`" Ti hjbduhtjr f`s ubnqui smnccs nb tfi `rt j ubntnboixpirt pc`yirs tj hri`ti sjkitfnbo kjri pjwiruc tf`btfi nbdipibdibt p`rts" G`kjus sykpfjbnis `cc hc`kjr tjfnri tfi list hjbduhtjrs"Nk`onbi tfi dnshjrd n `b jrhfistr`„s trukpit sih+tnjb wiri tj ibtir tfrii l`rs tjj i`rcy= nt wjucd li p`nb+uccy ivndibt tj tfi `udnibhi `bd sf`ttir tfi kusnh`cixpirnibhi" Xj# nb tfi kuctnk`b`oir sp`hi# kuhf cnmi wntf jrhfistr`s# tfiri ns ` hci`r rjci jr tfi hjbduhtnbojro`bnz`tnjb# lut nb dihndnbo fjw kuhf tj p`y jr tfisirvnhi# `b nbvistjr kust `ssiss tfi –jrhfistr`‛ &nbhcusnvij tfi hjbduhtjr. `bd wf`t nt ns pc`ynbo tf`t ivibnbo" Ntns bj `hhndibt tf`t tfi tnhmits tj fi`r Ns``h Xtirb pir+jrk tfi Kibdicssjfb vnjcnb hjbhirtj wntf tfi Biw  ^jrm Qfncf`rkjbnh hjbduhtid ly Cijb`rd Lirbstinbhjst sulst`btn`ccy kjri tf`b tfi tnhmits tj `ttibd tfis`ki pirjrk`bhi pc`yid ly ` cjh`c `rtnst wntf ` hnvnh vjcubtiir jrhfistr`"Lut tf`t ns bjt fjw tfi nbvistkibt nbdustry hur+ribtcy jpir`tis5 _i riquibtcy p`ss eudokibt jb bjkn+b`c iis lijri wi ivib spibd jbi knbuti `ssissnbo tfitfrii ikpnrnh`c dnkibsnjbs j `lsjcuti riturbs# rnsm# `bd`ddid v`cui" Nb cjonh `bd st`tnstnhs# tfns irrjr ns mbjwb `s` ypi NN irrjr# `bd nt ns jbi j k`tirn`c hjbsiquibhi nbtfi lusnbiss j `ssit k`b`oikibt" @ssissnbo `ddid v`cui ns hruhn`c# `bd nt h`b ricnivitfi `ssit k`b`oir rjk f`vnbo tj pridnht tfi uturi"Nbsti`d j li`rnbo tfi prissuri j f`vnbo tj ouri jutnb `dv`bhi fjw suhhissuc tfi k`b`oir wncc li `bd#tfirijri# `oriinbo tj p`y `b nbv`rn`bt <*<1# `b nbvistjr`ctirb`tnvicy knoft `orii tj p`y tfi k`b`oir ` v`rn`lci`kjubt tf`t guhtu`tis nb dnriht prjpjrtnjb tj tfi v`cui`ddid# suleiht tj ` r`tnjb`c hincnbo" Cnmiwnsi# hci`rcy dibnbo `ddid v`cui h`b `csj ficp lj`rds `bd HNJsdihndi nb `dv`bhi wf`t tfinr –stjp cjss‛ wncc li# l`sid jbqu`btnt`tnvi ki`suris" Xuhf `b `pprj`hf wjucd nbhri`si`hhjubt`lncnty `bd `csj k`mi tfi dihnsnjb j huttnbo `bjbpirjrknbo k`b`oir kuhf i`snir `bd kjri jleihtnvijr ` lj`rd jr HNJ"Nb tfns sibsi# lrnbonbo tfi sihjbd `bd tfnrd ikpnrn+h`c dnkibsnjbs j ii `b`cysns nbtj tfi jro`bnz`tnjb`cprjhiss h`b li tr`bsjrk`tnvi w`y liyjbd tfi h`chuc`+tnjb j iis" _i `cc mbjw tf`t `t tfi tr`di civic# stjp+cjss ki`+suris `ri nkpjrt`bt tj dibi nb `dv`bhi" Fjw k`by lj`rd+`pprjvid nbvistkibt pc`bs f`vi hci`r st`bd`rdstf`t# n bjt kit# risuct nb ` k`b`oir linbo rid: Nsb„t nttrui tf`t nb `ht tfi –ri‛ dihnsnjb ns jtib dic`yid `bddil`tid—`bd sjkitnkis jr pjcntnh`c ri`sjbs# lih`usijbi p`rty jr `bjtfir ns trynbo tj s`vi `hi: Hjbsndir `HNJ rihjkkibdnbo tf`t tfi lj`rd fnri ` hirt`nb k`b+`oir" N wjucd li `r kjri nkprissid ly ` HNJ wfjdibid tirks jr ki`surnbo k`b`oir pirjrk`bhi `bdtjjm hjrrispjbdnbo `htnjb tf`b ly jbi wfj dndb„t f`vi `stjp+cjss prjhiduri nb pc`hi"Xj# fjw h`b wi tni tfisi tfrii ikpnrnh`c dnkibsnjbsnbtj jbi ii struhturi: Firi ns jbi `pprj`hf tf`t winbbjv`tid nb tfi hjbtixt j `b `htnvicy k`b`oid &d`ncy rnsm k`b`oikibt `bd dyb`knh `ccjh`tnjb. kuctnk`b`oirpjrtjcnj j hurribhy tr`dnbo sul`dvnsirs tj ditirknbi wf`t ns p`nd tj tfi nbvistkibt k`b`oir jr sicihtnbo tfi–kusnhn`bs‛ `bd linbo tfi –hjbduhtjr"‛ Ti Ikpnrnh`c Xjcutnjbs ii struhturi hjbsnsts j twj `kncn`r p`rts—` k`b`oikibt ii &KG. `bd `pirjrk`bhi ii &QG.—lut ns ubnqui nb vi hjbhriti w`ys5
 Ti `hhjubt*nbvistkibt kust kiit ` prjt`lncnty furdci jr tfi KG tj li p`nd"
 Ti QG ixpcnhntcy t`mis rnsm nbtj `hhjubt tj hri`ti`htu`c `cnobkibt j nbtirists"
 Ti QG f`s tj kiit ` v`cui+`ddid furdci lijri `by QG h`b li p`nd"
 Ti QG pirhibt`oi v`rnis l`sid jb rnsm+`deustidpirjrk`bhi"
 Ti jrkuc` sfnts tfi tnknbo j ii p`ykibts rjkcjwir+pirjrk`bhi pirnjds tj fnofir+pirjrk`bhipirnjds# wfib tfi iis `ri i`snir tj p`y `bd kjridisirvid"

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