What is an acceptable management fee?

The management fee varies, but usually ranges from 0.20% to 2.00%, depending on factors such as management style and size of the investment. Investment firms that are more passive with their investments tend to charge a lower commission compared to those that manage their investments more actively. Management fees, whether paid as a mutual fund spending ratio or as fees paid to a financial advisor, usually range from 0.01% to more than 2%. In general, the range in the amount of the fee is due to the management strategy.

For example, more aggressive investment portfolios tend to have higher management fees because they require more work due to higher stock turnover. Passive funds may have lower management fees because they select and then keep the assets in the portfolio. Passively managed index funds usually charge the lowest fees, and it's not uncommon for an index fund to charge less than 10 basis points. Management fees may vary from one administrator to another and from one financial firm to another, but are usually a percentage of the total assets under management.

Sometimes, an investment manager consolidates a client's various fees into what is called a global commission. This disparity in fees charged is generally attributed to the investment method used by the fund manager. Under a tiered investment management fee structure, different asset levels are evaluated at their own specific commission rates. Compared to the impact of Fed policy or management decisions, minimizing investment fees may seem like a consolation prize.

Before you agree to work with an investment manager or advisor, make sure you understand the fee structure and the services included in that fee. Active fund managers rely on market inefficiencies and price errors to identify stocks that have the potential to outperform the market. For active fund managers to outperform the market by just 1%, they would have to achieve a return of more than 2% just to cover the average management fee of 1.19% percent. This means that even if you pay more fees for an actively managed portfolio, you may not get any additional rewards.

Investment managers use their experience and time to select securities and manage their clients' portfolios. These are some of the most common commission structures you'll encounter when partnering with an investment manager or financial advisor. Essentially, management fees are the cost of managing your investment or investments in a professional manner.