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Money Management: Fixed Fee or Percentage of Assets

If a manager receives part of their salary based on how the portfolios they manage are performing then the manager would want to see his or her portfolio have a high return. The money manager might take extra risks that the client may not have normally wanted just so he or she can make extra money for themselves. One way to keep the manager acting in a professional way is to make sure that every trade that is done has written permission from the client. This way the client will know exactly what is being done in the account plus the company will have written proof that the client wanted the transaction done.

Money management has risks for both the investor and the manager of the fund. A risk the investor had to keep in mind is not only can they lose money on their investments, but the will also have to pay management fees. Management fees are the compensation an investment company pays to the investment management company for it services (Reilly & Brown 2012). This could be a large amount depending on how much money the investor has invested with the manager. There is really no way to avoid paying these fees but the investor could work with the company to get a better rate. The manager has to remain honest when they are dealing with their client's money. A good way to make sure this happens is to have surprise audits of the accounts. This way the manger can't hide anything because they know an audit is coming up.

Question: Is it better for an investor to pay a fixed fee (or percentage of assets) for the manager's services?

Solution Preview

It is better for an investor to pay a percent of assets for the manager's services. If the assets grow the manager gets more. If the manager takes excessive risks with the objective of increasing the returns and his own remuneration, then if an adverse event occurs and the value of the assets goes down, ...

Solution Summary

The response provides you a structured explanation of how management fees for portfolio management should be given. It also gives you the relevant references.

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