CMD Asset Management has the following fee structure for clients in its equity f
ID: 2625108 • Letter: C
Question
CMD Asset Management has the following fee structure for clients in its equity fund:
1.00% of first $5 million invested
0.75% of next $5 million invested
0.60% of next $10 million invested
0.40% above $20 million
a. Calculate the annual dollar fees paid by Client 1, who has $27 million under management, and Client 2, who has $97 million under management.
b. Calculate the fees paid by both clients as a percentage of their assets under management.
c. What is the economic rationale for a fee schedule that declines (in percentage terms) with increases in assets under management?
Explanation / Answer
Fee structure
Client 1
Client 2
Answer
Investment Slab
Fee
Investment Slab
Fee
1.00% of first $5 million invested
5000000
50000
5000000
50000
0.75% of next $5 million invested
5000000
37500
5000000
37500
0.60% of next $10 million invested
10000000
60000
10000000
60000
0.40% above $20 million
7000000
28000
77000000
308000
a
Fee payable
175500
455500
Investment
27000000
97000000
b
fee as percentage of investment (Fee*100/Investment)
0.65
0.47
Answer c:
From Investor point of view every time investor increase the investment money he taken larges risk and discount on fee may be a premium for larger risk taken by him.
Discount in fee may be a affective tool for inducing the investor to invest more.
The more money, circulated as investment gives higher return to the Assets Management Company and thats why company offer discount in fee for every increase in investment
Fee structure
Client 1
Client 2
Answer
Investment Slab
Fee
Investment Slab
Fee
1.00% of first $5 million invested
5000000
50000
5000000
50000
0.75% of next $5 million invested
5000000
37500
5000000
37500
0.60% of next $10 million invested
10000000
60000
10000000
60000
0.40% above $20 million
7000000
28000
77000000
308000
a
Fee payable
175500
455500
Investment
27000000
97000000
b
fee as percentage of investment (Fee*100/Investment)
0.65
0.47