The division gives the book size that pays for the team; a flow model gives the month it gets there, and the month the losses are finally repaid.
Divide the team's annual cost by the margin the manager keeps on each euro the channel raises, after retrocessions and servicing costs. An illustrative wealth distribution team costing 3,000,000 a year, on a net margin of 0.65 per cent, breaks even at 461.5 million of AUM, not the 240.0 million the headline 1.25 per cent fee suggests. With a realistic ramp it reaches that run rate in month 56 and repays its accumulated losses only in month 107.
Worked in full in The Private Wealth Fundraiser by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every manager that builds a private wealth channel asks the same question in its budget: how big does the book have to get before the team pays for itself? The answer has two parts that are often confused. The run-rate break-even is the AUM at which a month's net revenue covers a month's cost. The payback is the month in which cumulative revenue has repaid every month of loss that came before it. The first is a simple division. The second needs a flow model, and it is usually years later.
| Annual cost | Amount |
|---|---|
| Head of private wealth | 600,000 |
| Four external wholesalers | 1,200,000 |
| Two internal sales | 300,000 |
| Product, operations and marketing | 400,000 |
| Platform due diligence and onboarding fees | 300,000 |
| Travel and advisor events | 200,000 |
| Total | 3,000,000 |
| Input | Value |
|---|---|
| Management fee on NAV | 1.25% |
| Retrocession to distributors | 0.50% |
| Wealth class servicing cost borne by the manager | 0.10% |
| Net margin | 0.65% |
| First subscriptions (platform approvals) | month 7 |
| Gross flows | 3.0 million in month 7, plus 0.3 million a month, capped at 12.0 million |
| Redemptions, from month 13 | 0.4% of AUM a month, about 4.7% a year |
| Net performance | 6% a year |
Net margin = management fee − retrocession − servicing cost = 1.25% − 0.50% − 0.10% = 0.65%
Break-even AUM = annual cost ÷ net margin = 3,000,000 ÷ 0.65% = 461,538,462
In Excel: =B1/(B2-B3-B4), with the cost in B1 and the three rates in B2 to B4. For the payback, run AUM month by month: opening AUM grown at the monthly performance rate, plus gross flows, less redemptions. Revenue for the month is the average AUM times 0.65% divided by 12; subtract 250,000 of cost and accumulate.
The division gives the size of the book that pays for the team. It says nothing about when the book reaches that size, and a distribution team starts costing money on the day it is hired, months before the first platform approves the fund.
| Month | AUM | Annualised net revenue | Cumulative profit |
|---|---|---|---|
| 12 | 22.7 | 0.13 | −2.97 |
| 24 | 100.7 | 0.63 | −5.59 |
| 36 | 222.9 | 1.41 | −7.56 |
| 48 | 369.9 | 2.36 | −8.63 |
| 60 | 518.5 | 3.33 | −8.75 |
| 84 | 820.3 | 5.29 | −6.05 |
| 120 | 1,284.9 | 8.31 | 5.45 |
Monthly revenue first covers monthly cost in month 56, when AUM reaches 468.8 million: the division's 461.5 million, a little higher because revenue is earned on the month's average AUM, which trails the closing figure. By then the team has accumulated a deficit of 8.82 million, the deepest point of the curve, in month 55. Every month after that repays part of it, and the deficit is gone in month 107, with 1,115.5 million under management. The run-rate break-even arrives in year five; the investment in the channel is repaid in year nine.
Two numbers belong in the business plan, not one. A board that hears "break-even at 461.5 million" will assume the channel is profitable from month 56. It is, monthly. It has also absorbed nearly 9 million of the firm's capital by then, which is the amount the firm has to be able to fund.
| Net margin | Annual cost | Break-even AUM, million | Run-rate month | Payback month |
|---|---|---|---|---|
| 0.50% | 2.5 million | 500.0 | 60 | 113 |
| 0.50% | 3.0 million | 600.0 | 68 | after 120 |
| 0.65% | 2.5 million | 384.6 | 50 | 94 |
| 0.65% | 3.0 million | 461.5 | 56 | 107 |
| 0.65% | 3.5 million | 538.5 | 63 | 119 |
| 0.80% | 2.5 million | 312.5 | 44 | 82 |
| 0.80% | 3.0 million | 375.0 | 49 | 92 |
Margin moves the answer more than cost does. Raising the net margin by 15 basis points, from 0.65 to 0.80 per cent, which is a retrocession of 0.35 per cent instead of 0.50, brings payback forward by 15 months; cutting the team's cost by 500,000 does it by 13. At 0.50 per cent and the full team, the channel has not repaid its losses after ten years. That is the arithmetic behind the advice to negotiate the retrocession before hiring the fourth wholesaler.
Dividing the cost by the headline fee. At 1.25 per cent the team breaks even at 240.0 million, 48.0 per cent below the real figure, because the retrocession and the servicing cost take 0.60 of the 1.25 points before the manager sees any of it. Plans built on the gross fee declare the channel profitable at a book size where it is still losing money every month. The second mistake is to stop at the division and present the run-rate month as the payback. The two are 51 months apart in this case.
Break-even AUM is the annual cost divided by the net margin: 461.5 million here. Model the ramp to find when the book gets there and when the losses are repaid, months 56 and 107. Gross flows and the number of advisors behind them are worked in how many advisors it takes to raise 100 million, and the free workbook for this case runs a full cohort forecast you can put this cost line against.
Run-rate break-even is the month in which net revenue first covers that month's cost; payback is the month in which cumulative revenue has repaid all earlier losses. In the illustrative case they are 51 months apart: the team covers its 250,000 monthly cost from month 56 but repays its 8.82 million deficit only in month 107.
No. Use the margin the manager keeps after retrocessions to distributors and any servicing cost it bears. A 1.25 per cent fee with a 0.50 per cent retrocession and 0.10 per cent servicing leaves 0.65 per cent, and the break-even for a 3,000,000 team rises from 240.0 million on the gross fee to 461.5 million.
In the illustrative model, margin. Raising the net margin from 0.65 to 0.80 per cent brings payback forward from month 107 to month 92, while cutting annual cost from 3.0 million to 2.5 million brings it to month 94. At a 0.50 per cent margin the full team has not repaid its losses after 120 months.
This article is one calculation from The Private Wealth Fundraiser. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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