DSRF. Management Fees VS Disclosed Commissions. Management Fees. A fee is charged by a money manager as compensation for managing a portfolio Fees are usually based on a % of assets under management
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Management Fee vs. Disclosed commission
10,000,000 DSRF Amount 10,000,000
700,000 Investment Earnings 700,000
(50,000) = FeeCommission = (50,000)
650,000 Net Income 650,000
700,000 Gross Rebatable Earnings 650,000
650,000 Allowable Earnings 650,000
(Based on 6.5% cost-of-funds)
When we take into account the rebate ramifications, these become two very different transactions. In scenario 1 the management fee’s are not qualified administration costs and are therefore not exempt from rebate. In scenario 2 the disclosed commissions are qualified administration costs and are exempt from the rebate calculation.
( 50,000) Amount Due to -0-
In both scenarios the institution netted 6.50% or $65,000 on their DSRF investments before rebate considerations. At first appearance this appears to be two equal transactions.
In this example we are considering how the rebate regulations deal with portfolio management fee’s and transaction based commissions.
In scenario 1 the money manager charges an annual management fee of 50 basis points or $50,000. In scenario 2 the broker charged $50,000 in total commissions for the year.
Lets assume that an institution has a $10,000,000 DSRF that they want to outsource to an outside advisor.
We will also assume that the institution will will earn 7% gross of expenses in both scenarios.
BOTTOM LINE: Management fees are NOT allowable expenses, but disclosed commissions are. Using a fee structure is just giving money away!