Performance-Based Investment Advisory Fee
What is a “performance-based investment fee”?
A performance-based investment advisory fee connects a professional money manager’s fee with results. Such a fee can be calculated in a variety of ways, but we strive to keep it simple. Our performance-based fee, which we call our “Profit-Based Fee”, is charged only when the value of a client’s account reaches a new high.
The Securities and Exchange Commission (SEC) permits investment advisors to charge performance-based compensation to “qualified clients”. A qualified client is defined as an individual or entity that has at least $1.4 million in assets under management with the advisor or has a net worth of more than $2.7 million exclusive of primary residence (see disclosure for further details).
The following graph is a visualization of the management fees that you would pay as a part of the 10%-of-Profit Fee.
“If we have a down year, we don’t get paid”
- Steve Check, President and CIO
What are some examples of how the Performance-Based Fee works?
The Performance-Based Investment Fee is illustrated in the following examples:
Example 1:
Client A engages CCM to manage a $1 million account on 8/14/2023. The first Annual Fee Assessment Date is 9/30/2024. During the initial Billing Period (8/14/2023 - 9/30/2024), the account value gains 10% to $1,100,000 (assuming no deposits/withdrawals). Below is the calculation for the 10%-of-Profits Fee.
Account’s inception value (initial High-Water Mark): $1,000,000
New Appreciation = $1,100,000 - $1,000,000 = $100,000
10% of any New Appreciation: 10% x $100,000 = $10,000
New High-Water Mark after year one: $1,100,000
Example 2:
Client A engages CCM to manage a $1 million account on 8/14/2023. The first Annual Fee Assessment Date is 9/30/2024. During the initial Billing Period (8/14/2023 - 9/30/2024), the account value declines 10% to $900,000 (assuming no deposits/withdrawals). Since there’s no profit, no 10%-of-Profits Fee would have been due. The Billing Period is extended, and the next Annual Assessment Date is 9/30/2025. In year two (10/01/2024 – 9/30/2025), Client A’s account value appreciates from $900,000 to $1,200,000 (again, assuming no deposits/ withdrawals). Below is the calculation for the 10%-of-Profits Fee due at the end of year two.
Account’s inception value (initial High-Water Mark): $1,000,000
New Appreciation = $1,200,000 - $1,000,000 = $200,000
10% of New Appreciation: 10% x $200,000 = $20,000
New High-Water Mark after year two: $1,200,000
Frequently Asked Questions
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No, because the high-water mark was $1,000,000 after Year 1. $1,200,000 is a gain of $200,000 above that level, so 10% of the $200,000 gain will be the charge
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It has happened in the past and could happen again. We have enough company reserves to pay ourselves during these years.
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The Securities and Exchange Commission defines Qualified Clients as
a) those whose net worth is at least $2.7 million (exclusive of their equity in their primary residence), or
b) clients who have at least $1.4 million with the investment manager.
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We think it’s the right thing to do. Advisors everywhere get paid regardless of whether an account they manage goes up or down in value. We think it appropriate to offer a fee option where our bill is subject to whether we make our clients money or not.
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In our experience, it’s that clients don’t like to pay financial advisors fees to lose them money. They are happy to pay their advisor when their accounts increase in value, and even pay them generously when the accounts rise considerably.
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Most financial planners are asset allocators. Their job is to diversify their clients with mutual funds and ETFs, both of which have their own expense ratios, also known as “fees”. Our competition typically isn’t in the business of trying to perform or outperform. They are in the business of financial planning and the investment selection is a byproduct of this result. They don’t want their compensation tied to such strict measures as it puts their own livelihood at risk.