A sliding-scale fee schedule worked band by band, with the effective and marginal rates, the aggregation clause and the cliff that is not a tier.
A tiered management fee charges each band of assets at its own rate and adds the bands up: the rate for the first band applies only to the assets inside it, however large the mandate grows. On an illustrative schedule of 40 basis points on the first 100 million, 25 on the next 200 million and 15 above 300 million, a 450 million mandate pays 1,125,000 a year, an effective 25.00 basis points, not the 15 of its top band nor the 40 of its headline rate.
Worked in full in Asset Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Fee schedules with breakpoints are the norm for segregated mandates, and the client usually negotiates three numbers: the headline rate, the breakpoints and how many accounts are aggregated before the schedule is applied. The effective rate, fee over assets, is the only figure that can be compared across managers, and it has to be computed rather than read off the schedule.
| Band of assets | Band size | Rate, bp |
|---|---|---|
| First 100 million | 100,000,000 | 40 |
| Next 200 million (100m to 300m) | 200,000,000 | 25 |
| Above 300 million | unlimited | 15 |
The mandate's average assets over the year are 450,000,000. The fee is computed on average assets because that is what most investment management agreements specify; computing it on year-end assets rewards a manager for a rising market twice.
Step 1. Fill each band in order
First band: 100,000,000 at 0.40% = 400,000. Second band: 200,000,000 at 0.25% = 500,000. Third band: the remaining 150,000,000 at 0.15% = 225,000.
Step 2. Add the bands
400,000 + 500,000 + 225,000 = 1,125,000.
Step 3. Effective rate
1,125,000 / 450,000,000 = 0.250 per cent, 25.00 basis points.
In Excel
With assets in B1: =MIN(B1,100e6)*0.4%+MAX(0,MIN(B1,300e6)-100e6)*0.25%+MAX(0,B1-300e6)*0.15%. A quicker form uses the cumulative fee at each breakpoint: 900,000 at 300 million, plus 15 basis points on everything above it.
The marginal rate, the rate on the next euro of assets, is 15 basis points. It matters for decisions at the margin: adding 50 million to this mandate costs 75,000 a year, not the 125,000 the effective rate would suggest.
| Average assets, m | Fee | Effective, bp | Marginal, bp |
|---|---|---|---|
| 50 | 200,000 | 40.00 | 40 |
| 100 | 400,000 | 40.00 | 25 |
| 200 | 650,000 | 32.50 | 25 |
| 300 | 900,000 | 30.00 | 15 |
| 450 | 1,125,000 | 25.00 | 15 |
| 600 | 1,350,000 | 22.50 | 15 |
| 1,000 | 1,950,000 | 19.50 | 15 |
The effective rate falls continuously as assets grow and approaches the top-band rate without reaching it. The converse is the point clients forget: when assets fall, the effective rate rises. A scheme that pays out of its mandate, or a market fall, moves the account back up the schedule, so the client pays more per euro on a smaller account. That is a feature of the schedule, not a fee increase, but it shows up in the cost line all the same.
The same mechanics answer the question a client asks at a review: how much would a lower headline save? Cutting the first band from 40 to 35 basis points saves 5 basis points on 100 million, a fixed 50,000 a year on any mandate of 100 million or more. Moving the first breakpoint down from 100 million saves money only on the slice that moves into a cheaper band. Run both through the schedule before choosing which concession to ask for; on a large mandate the breakpoints usually matter more than the headline.
Suppose the same 450 million were held as two separate mandates of 225,000,000 each with the same manager, and the schedule applied to each account. Each would pay 400,000 on its first 100 million and 312,500 on the next 125 million, 712,500 per account and 1,425,000 in total: an effective 31.67 basis points. Aggregating the two accounts before applying the schedule saves 300,000 a year, 21.1 per cent of the fee, with no change to any rate. A clause that aggregates all of a client's assets with the manager is often worth more than a few basis points off the headline.
Quarterly billing applies the annual schedule to each quarter's average assets and divides by four. With quarterly assets of 420, 440, 465 and 475 million the four bills are 270,000, 277,500, 286,875 and 290,625: 1,125,000 in total, the same as the annual calculation because every quarter sits in the top band. If a quarter crosses a breakpoint the two methods diverge slightly, and the agreement should say which applies.
Applying the rate of the band the assets reach to the whole account. On 450 million that gives 15 basis points on everything, 675,000, and understates the fee by 450,000. The opposite error applies the headline 40 basis points to everything, 1,800,000, overstating it by 675,000. Some schedules really are written that way, as a "cliff" where crossing a breakpoint reprices the whole account; under a cliff, 300 million would pay 450,000 while 299 million would pay almost 750,000, and the manager has an incentive to keep the account just below the line. Read the agreement before building the model. The same marginal arithmetic, with a minimum fee on top, drives private fund administration charges: see how fund administration fees are calculated. For what the fee then does to the client's return, see why money-weighted trails time-weighted, and for the passive comparison, what one percentage point of fees costs.
Charge each band at its own rate and add them: 1,125,000 on 450 million, 25.00 basis points effective, 15 at the margin. Report the effective rate, watch it rise when assets leave, and negotiate aggregation before the headline. The free workbook for this case takes a real breakpoint schedule through five years of flows and shows the effective rate moving with them.
The effective rate is the total fee over total assets; the marginal rate is what the next euro costs. On a 450 million mandate under a 40/25/15 basis point schedule the effective rate is 25.00 basis points and the marginal rate is 15, so adding 50 million costs 75,000 a year rather than 125,000.
Because the low top-band rate applies to fewer assets while the expensive first bands stay full. Under the same schedule 450 million pays 25.00 basis points, 300 million pays 30.00 and 100 million pays 40.00. The schedule has not changed; the account has moved back up it.
Yes, often by more than a rate cut. Two 225 million accounts charged separately pay 712,500 each, 1,425,000 in total and 31.67 basis points. Aggregated as one 450 million relationship they pay 1,125,000. The saving of 300,000 a year is 21.1 per cent of the fee.
This article is one calculation from Asset Management. 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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