# What Is a Management Fee? Definition, Average Cost, and Example

![Management Fee: The price charged by fund managers to invest capital on behalf of clients. ](https://www.investopedia.com/thmb/KkNMOx3ILo-eYyh7iEraDy2B1wk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/managementfee.asp-final-c3496eddbf2a4998895236e1cc209f13.png)

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## What Is a Management Fee?

A management fee is a charge that [investment managers](https://www.investopedia.com/terms/i/investment-manager.asp) levy for managing an investment fund, compensating them for their expertise and time. Typically based on a percentage of [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp), management fees may also incorporate [investor relations](https://www.investopedia.com/terms/i/investorrelations.asp) and administrative costs. Fees can vary significantly, generally ranging from 0.10% to over 2% of AUM. A well-managed fund not only involves stock selection and portfolio management but can lead to better financial gains for investors.

### Key Takeaways

*   Management fees compensate fund managers for their expertise in selecting and managing investments.  
    
*   These fees vary widely, typically ranging from 0.10% to more than 2% of assets under management.  
    
*   Actively-managed funds often charge higher fees but do not necessarily deliver better returns than passively-managed funds.  
    
*   Hedge funds use a "two and twenty" fee structure, which includes a flat 2% of total asset value plus 20% of all profits.  
    
*   Before investing, it's crucial to understand all fees involved and assess whether the potential returns justify these costs.

## Understanding the Mechanics of Management Fees

A management fee is the cost of having your assets professionally handled. The fee compensates professional money managers as they select securities for a fund’s portfolio and manage it based on the fund’s investment objective.

Management [fee structures](https://www.investopedia.com/terms/f/fee-structure.asp) vary from fund to fund but they're typically based on a percentage of [assets under management](https://www.investopedia.com/terms/a/aum.asp) (AUM).

> **Fast Fact**
>
> A mutual fund's management fee could be stated as 0.5% of assets under management.

## Exploring the Range of Management Fees

Management fees can range from as low as 0.10% to more than 2% of AUM. This disparity in the fee is generally attributed to the investment method used by the fund’s manager. The more actively managed a fund is, the higher the management fees.

Aggressive stock funds cost more to manage because they trade frequently, unlike passively-managed [index funds](https://www.investopedia.com/terms/i/indexfund.asp) that trade less.

> **Important**
>
> Actively-managed funds generally result in higher management fees than those that are more passively managed but they don't necessarily see better returns than those of passively-managed funds. They might see worse returns in some cases.

## Evaluating the Value of High Management Fees

Active fund managers look for market mispricings to find stocks that might outperform. The [efficient market hypothesis](https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp) (EMH) has shown that stock prices fully reflect all available information and expectations, however, so current prices are the best approximation of a company’s intrinsic value.

This makes it hard to consistently profit from mispriced stocks due to random price changes and unexpected events. The EMH suggests that consistently beating the market over long periods is mostly due to chance. Higher-cost actively-managed funds do tend to underperform lower-cost passively-managed funds in all categories, according to decades of Morningstar research.

Research by [Nobel laureate William Sharpe](https://www.investopedia.com/terms/w/william-f-sharpe.asp) has shown that “After costs, the return on the average actively-managed dollar will be less than the return on the average passively-managed dollar for any time period.”

Sharpe concluded that active fund managers underperform passive fund managers not because of any flaw in their strategies but because of the laws of arithmetic. Active fund managers would have to achieve an excess return of more than 2% just to account for the average 1.19% management fee to beat the market by only 1%.

## Navigating Hedge Fund Management Fees

[Hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) charge notoriously high fees that have become controversial as performance has often lagged the market. Their fee structure is commonly referred to as "[two and twenty](https://www.investopedia.com/terms/t/two_and_twenty.asp)" because it consists of a flat 2% of total asset value and 20% of all profits earned.

The plan is often criticized but it's been the norm since Alfred Winslow Jones founded what is often considered to be the first hedge fund, AW Jones & Co., in 1949. Increased competition and investor dissatisfaction have pressured managers to lower fees and adopt performance-based incentives.

## What Fees May Be Payable in Addition to Management Fees?

The U.S. Securities and Exchange Commission cites penalty fees for not maintaining a minimum balance in your account. You might also have to pay inactivity fees and various additional maintenance fees.

## What Are 12b-1 Fees?

These fees are commonly charged to mutual funds. They cover the costs of marketing and shareholder services and they can even pay for employee bonuses. The good news is that they usually can't be more than 1% of the assets you hold.

## Do 401(k) Plans Have Fees?

They do and they're commonly paid by the plan's participants. The Plan Sponsor Council of America estimates that they amount to about $30 billion annually, but you can take a little heart because this number is spread over 60 million participants holding $3 trillion in assets.

ERISA, the Employee Retirement Income Securities Act, oversees 401(k) plans but it has authority only over plan sponsors, not their investment managers.

## The Bottom Line

Management fees are a crucial consideration when investing, as they can significantly impact your returns. These fees, often a percentage of assets under management, vary widely depending on whether funds are actively or passively managed. Actively managed funds usually have higher fees and may not consistently outperform passive funds.

It's important to weigh these costs against potential benefits before investing. Additionally, hedge funds typically charge high fees in the form of "two and twenty." Be sure to understand all fees, including potential penalty fees and 12b-1 fees, and consider shopping around to find the best options for your investment needs.

> **Article Sources**
>
> 1.  FinancialEdge. "[What Is a Management Fee?](https://www.fe.training/free-resources/project-finance/management-fee/)"
>     
> 2.  The Financial Analysts' Journal. "[The Arithmetic of Active Management](https://web.stanford.edu/~wfsharpe/art/active/active.htm)."
>     
> 3.  Kruze Consulting. "[What Is the 2% and 20% VD Fee Structure?](https://kruzeconsulting.com/blog/two-and-twenty-vc-fee-structure/)"
>     
> 4.  U.S. Securities and Exchange Commission. "[How Fees and Expenses Affect Your Investment Portfolio](https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf)." Page 5.
>     
> 5.  FINRA. "[Investment Products Mutual Funds](https://www.finra.org/investors/investing/investment-products/mutual-funds#fees-and-expenses)."
>     
> 6.  Plan Sponsor Council of America. "[The Art of Understanding 401(k) Plan Fees](https://www.psca.org/industry-intel/defined-contribution-insights/art-understanding-401k-plan-fees#:~:text=Investment%20fees%20are%20%28in%20most,of%20fees%20paid%20by%20participants.)."