Investing in managed accounts, from zero · Lesson 3 of 4
Performance fees and the high-water mark
6 min
What a performance fee is
Most managers take a percentage of the profit, for example thirty percent. If you make one hundred dollars in a period, thirty goes to the manager and seventy to you. The model is fair, as long as it is calculated correctly.
The problem: paying twice for the same profit
Suppose your account grows from one thousand to one thousand one hundred dollars and the manager takes a fee. The next month it falls back to one thousand, and in the third month it reaches one thousand one hundred again. If the manager charges again, they have charged twice for the same hundred dollars.
The fix: the high-water mark
Under this rule, a fee is charged only when the account rises above the highest point at which a fee was previously calculated. In the example above, no fee is charged in the third month, because the account has only returned to its previous peak.
| Month | Account value | With the rule | Without the rule |
|---|---|---|---|
| First | One thousand one hundred | Fee on one hundred dollars | Fee on one hundred dollars |
| Second | One thousand | No fee | No fee |
| Third | One thousand one hundred | No fee | A second fee on the same hundred dollars |
Ask before you sign
- What is the fee percentage, and how often is it calculated?
- Is the high-water mark applied?
- Is there also a fixed monthly fee or a withdrawal fee?
More detail is in fees for investors.
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