A cost associated with utilizing the services of an investment manager. As other professionals do, investment managers charge for the combined benefits of their efforts and expertise when providing services to their clients. Oftentimes, additional costs are included in a portfolio’s management fee; administrative expenses related to the fund’s management, for example.
Asset management is both an art and a science. In order to successfully manage a portfolio, one needs to have significant mathematical and economic skill. Not everyone has been granted these gifts. Instead, some of us are great painters, great parents… mediocre painters or mediocre parents. You get the idea. Professional investment managers spend their time and effort trying to manage their clients’ portfolios successfully. And just as you would pay an attorney, a chef or a car mechanic for their services, investment managers expect to receive payment for their fees as well.
With that said, not every management fee is reasonable or should be agreed to without scrutiny. In particular, hedge fund managers have become increasingly controversial as hedge fund performance has dragged. Do your research before agreeing to pay fees that seem unreasonably high.
Wife: “You would not believe how high the management fees are at the investment management firm Dave recommended. I did some research and I’m leaning towards working with the smaller firm Elizabeth suggested. It has a great reputation and lower management fees.”
Husband: “And you would not believe how many Buffalo wings Dave ate last night. I thought I was going to have to carry him to his car.”
Wife: “Are you listening to me?”
Husband: “Sure. We’re talking about Buffalo wings.”