The following methodology may be of use in helping you to understand more fully what your organization pays for investment management costs.
Identify the fees you pay at the overall portfolio level (“overlays”)
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Consultant fees
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Investment office fees and expenses
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Wrap fees
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Other portfolio fees
Key question:
What are the specific services being provided and how are you paying for them? Be mindful of providers who promise that “everything is included.”
Identify fees you pay at the fund level for each investment vehicle
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Manager direct fees
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Performance fees
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Fund of fund fees
The types of vehicles in which you are invested make a difference; commingled funds and partnerships can have hidden expenses. Also try to understand how funds are aggregated to reach fee breakpoints.
Key question:
What fees are paid explicitly and what expenses are embedded in the performance of the fund?
Identify the activity and transaction-related expenses that are assessed within each investment (or by each manager)
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Trading and brokerage
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Prime brokers
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Custody, net of securities lending, if applicable
Very few investment managers break out trading and brokerage costs as a subset of direct expenses. It is important to question your managers about how they strive for the best execution possible in all trading.
Key question:
How do you ensure that you have the best possible execution of trades to keep transaction and brokerage costs low?
Identify the activities required for administrative oversight and management of your portfolio
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Audit and legal
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Administrator
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Staffing and benefits
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Infrastructure and facilities
Key question:
What are the outputs you receive that enable you to oversee your portfolio, and what are the costs associated with producing them? Examples include risk analytics and consolidated reporting.
