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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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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 • Fees include manager’s advice, commissions on transactions, account administration charges, and account performance reporting • Fees that are for discretionary management (like mutual funds) are not permitted for DSRFs • Even fees that are for non-discretionary management are not considered “Qualified Administration Costs”; they, therefore, cannot be claimed as a deduction in the rebate calculation
Disclosed Commissions • Commissions charge a client on a per transaction basis and are considered “Qualified Administration Fees”; commissions are a direct deduction in rebate calculation. • Undisclosed commissions are common in fixed income transactions--the client has no idea what he has been charged • Disclosed commissions are transparent--the client knows the charge (most stock trades are done this way) • NAM is fair and transparent: customers receive a trade confirmation stating NAM’s transaction cost basis and commission amount charged
DSRF IllustrationAssume the following: • $10,000,000 DSRF • Bond Issue’s COF = 6.50% • DSRF Investments earn 7% ($700,000 annually) • Management fee = 0.50% ($50,000 per year) • Commissions = 0.50% ($50,000 per year)
DSRF Illustration 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- Federal Government 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!
