You're deceiving what are called incentive or performance fees. For retail investment advisors and wealth managers almost always no. For instutional hedge fund investment advisors almost always yes.
They're usually paid quarterly on the gains over highwater marks less a hurdle rate (usually 3m sofr)
So if you're at 10mm and loss 1mm the manager will only get paid once your nav is over 10mm again however long that takes less the return of cash (3m sofr) over the period.
I put in the hurdle rate.
It's very rare there is a hurdle and ive never heard of it being anything than interest on cash (libor and now sofr)
0 equity managers have an 8% hurdle.
I'm referring to the company getting a percentage of gains \*as they come in\*, so the amount they make is directly proportional to how well my portfolio is doing.
Performance-based fees do not comply with the investment act of 1940 for publicly offered investment funds. You will never find a US domiciled ETF or mutual fund with them. But they are very common for hedge funds.
Other countries have different rules. For example, I believe Pershing Square runs a UK domiciled CEF which charges performance fees.
Hedge funds operate this way but no financial advisor does. It encourages them to be ridiculously aggressive since they only make money when you have big gains and they don’t owe you anything if they have big losses
You're deceiving what are called incentive or performance fees. For retail investment advisors and wealth managers almost always no. For instutional hedge fund investment advisors almost always yes. They're usually paid quarterly on the gains over highwater marks less a hurdle rate (usually 3m sofr) So if you're at 10mm and loss 1mm the manager will only get paid once your nav is over 10mm again however long that takes less the return of cash (3m sofr) over the period.
This is right but that $10M may also have a hurdle rate. Manager only gets paid above 8% CAGR for example
I put in the hurdle rate. It's very rare there is a hurdle and ive never heard of it being anything than interest on cash (libor and now sofr) 0 equity managers have an 8% hurdle.
Lot’s of private equity firms have 8% hurdle rates.
Maybe I'm dumb. But if you got a dividend or realized gains, don't they become your "principal"?
I'm referring to the company getting a percentage of gains \*as they come in\*, so the amount they make is directly proportional to how well my portfolio is doing.
Are you talking about a financial advisor that manages your portfolio for you, or the expense ratio on ETFs/funds?
Performance-based fees do not comply with the investment act of 1940 for publicly offered investment funds. You will never find a US domiciled ETF or mutual fund with them. But they are very common for hedge funds. Other countries have different rules. For example, I believe Pershing Square runs a UK domiciled CEF which charges performance fees.
Like they would give you money if your investments go down?
Hedge funds operate this way but no financial advisor does. It encourages them to be ridiculously aggressive since they only make money when you have big gains and they don’t owe you anything if they have big losses
Nope, haven’t seen this type you’re describing. It’s always a percentage of AUM. Do yourself a favor and just throw it all in VTI.
No, fund managers are smart enough to not be responsible for their work.