Fee structure

From CEOpedia | Management online
Fee structure
See also

Fee structure is a list that indicates all the rates that can be paid for services of the company. Thanks to fee structure customers know how much they will pay for certain services. Potential clients schould never forget check a company,s a fee structure to make sure they find it satisfactory before deciding. In many countries publishing price list (for example in form of fee structure) is required by the law. Fee structure helps to compare prices of different companies. Therefore, some of them hide their lists, e.g. they don't show them on websites.

Fee structures go a long way in determining the value of various services. When faced with many options, clients or customers can select from a range of service and benefits levels based on different fee structures.

Fee structure examples

  • Banks publish their fee structures which contain all the rates for certain services, e.g. issuing credit card, bank account, transfer. Other example is university that publishes fee structure for studying certain programmes (usually per semester fee or annual tuition fee).

The list can also present special situations that make customers eligible to pay less (e.g. high volume of orders, long time customer).

  • For example, the fee structure for an online auction website, would the cost to display the item more prominently in the site's search results the website's commission if the item is sold, list the cost to place an item for sale and so on.
  • As another example, hedge fund's fee structure would show how much the fund manager will receive if the fund meets or exceeds predefined performance targets and how much an investor must pay if he withdraws his prematurely funds and what the fund manager charges to run the fund.

The classic fee structure for hedge funds is "2 and 20". Meaning, on assets under management fund manager charges 2% and another 20% for profits or outperformance over some threshold. This fee structure would be used to provide a base level of fees for the management of the fund (2%), plus an additional 'incentive' fee aligning the manager and investor interest.

Flat fee structures

Flat fee structures are more common. For absolute return strategies, which seek to outperform regardless of market direction, quite often are used incentive fees. Relative performance strategies seek to outperform a benchmark. Asset managers often charge a simple, flat rate for assets under management.

In reality, in the management of other's capital, never fee structure is perfect. Fee structures with an incIn reality, in the management of other's capital, never fee structure is perfect. Fee structures with an incentive or outperformance component could encourage a "swing for the fences" mentality. While flat fees could stifle innovation, creativity, or drive since a fee is earned regardless of performance(G. Niehaus, 1990).


Author: Angelika Bogdanik