Management, performance, servicing, platform, advice and an upfront load, lined up in one column. The sum of the fixed fees is not the cost.
Stack every layer a wealth client pays on a semi-liquid private markets fund (fund expenses, management fee, share class servicing fee, performance fee, platform fee and the advisor's fee) and an illustrative 11.0 per cent gross return arrives as 6.14 per cent net: the fees take 4.86 points, 44.2 per cent of the return. Add a 3.0 per cent upfront fee and, over five years, the client keeps 44.7 per cent of the gain the portfolio made.
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 →
Each layer is disclosed somewhere: the management and performance fees in the fund's offering documents, the servicing fee in the share class terms, the platform and advice fees in the client agreement. What is rarely done is to put them in one column, in the right order, and subtract. That is the total-cost sheet a fund raising from private wealth should be able to produce on request, because the advisor's compliance team will build it anyway.
| Layer | Who receives it | Rate |
|---|---|---|
| Gross portfolio return | (illustrative) | 11.0% |
| Fund operating expenses | Administrator, auditor, depositary | 0.40% |
| Management fee | Manager | 1.25% |
| Ongoing servicing fee of the share class | Distributor | 0.85% |
| Performance fee, 5% hurdle, full catch-up | Manager | 12.5% |
| Platform and custody | Platform | 0.30% |
| Advice fee | Advisor | 1.00% |
| Upfront placement fee, one-off | Distributor | 3.0% |
Excel, with the pre-performance return in B2:
=IF(B2<=5%,0,IF(B2<5%/(1-12.5%),B2-5%,12.5%*B2)) for the performance fee.
Who gets the 4.86 points? The manager takes 2.31 (management fee and performance fee), 48 per cent of the total. The distribution chain takes 2.15 (servicing, platform, advice), 44 per cent. Fund expenses are the remaining 0.40, or 8 per cent. A fund raising from wealth managers is asking the client to pay almost as much for distribution as for management.
In money, on a client holding of 500,000, the stack costs about 24,300 a year in the base case, of which 10,750 goes down the distribution chain. That is the figure an advisor's compliance team will put beside the fund on a total-cost disclosure, and it is the figure a share class designed for one distributor has to beat.
A 3.0 per cent placement fee comes off the subscription, so 100 invested buys 97 of NAV. At 6.14 per cent a year for five years, the 100 becomes 130.65, an annualised 5.49 per cent: the load costs 0.64 points a year on a five-year hold, 1.07 points on a three-year hold and 0.32 on a ten-year hold. The same 100 compounding at the gross 11.0 per cent would have reached 168.51. Of the 68.51 the portfolio earned, the client receives 30.65: 44.7 per cent.
| Gross return | Before performance fee | Performance fee | Net to client | Total fees | Share of gross |
|---|---|---|---|---|---|
| 7.0% | 4.50 | 0.00 | 3.20 | 3.80 | 54% |
| 8.0% | 5.50 | 0.50 | 3.70 | 4.30 | 54% |
| 9.0% | 6.50 | 0.81 | 4.39 | 4.61 | 51% |
| 11.0% | 8.50 | 1.06 | 6.14 | 4.86 | 44% |
| 13.0% | 10.50 | 1.31 | 7.89 | 5.11 | 39% |
Fees are a larger share of a smaller return. Most of the stack is a fixed percentage of NAV that is charged whatever the portfolio does, so in a weak year the client gives up more than half the return. The 8.0 per cent row sits in the catch-up zone: the fund return of 5.50 is just above the 5 per cent hurdle and the manager takes everything above it, 0.50. The catch-up only ends at a fund return of 5.714, where the manager's share reaches 12.5 per cent.
The hurdle is tested on the return after the management and servicing fees, not on the gross return and not on what the client finally receives. A client netting 3.70 per cent can still have paid a performance fee.
Adding the fixed percentages and calling the total the cost. Expenses, management, servicing, platform and advice sum to 3.80 per cent, which looks like the answer and is the figure most often quoted. It leaves out the performance fee, 1.06 in the base case, and the upfront load, 0.64 a year over five years. The fixed fees are 78 per cent of the annual stack; the rest is what the summary sheet forgets. The second mistake is comparing a semi-liquid fund's net return to a listed index fund's gross return: the right comparison is client net to client net, platform and advice included on both sides.
The fee stack, the total-cost sheet and the new-class test are among the working documents on the companion page of The Private Wealth Fundraiser, with the free Thornbury forecast workbook. For what the liquidity terms of the same vehicles cost when redemptions are gated, see how long it takes to exit a gated semi-liquid fund.
It is every layer added up: fund expenses, management fee, the share class servicing fee, the performance fee, platform and advice fees, plus any upfront load. In an illustrative case these fixed percentages sum to 3.80 per cent a year, and the performance fee adds 1.06 at an 11.0 per cent gross return.
Below the hurdle there is no fee. Above it the manager takes all of the return until its share reaches the fee rate, then the fee rate of everything. With a 12.5 per cent fee over a 5 per cent hurdle, the catch-up ends at a 5.714 per cent fund return; at 8.50 per cent the fee is 1.06.
It depends on how long the client stays. In an illustrative fund netting 6.14 per cent a year, a 3.0 per cent load costs 1.07 points a year over three years, 0.64 over five and 0.32 over ten. Spreading it over the longest plausible hold understates the cost for most clients.
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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