July 25, 2019
Performance-Based Fees
Fees
The word “Fees” is the most-feared word in the financial industry. Decades of deceptive practices by financial advisors and mutual fund companies have led consumers and regulators alike to push for transparency in the industry. This push has steered the asset and wealth management industry towards an Assets Under Management (AUM) fee in which the fee a client pays is based on a percentage of assets managed. As a firm, we offer AUM fees, and we believe that the AUM fee structure eliminates the conflicts of interest that arise from commission-based products and aligns with our fiduciary duty to always put our client’s interests ahead of our own.
As Elbert Capital Management continues to grow, we routinely analyze our service offerings to determine how they impact our clients now and in the future. Leveraging John’s background in private equity and Jason’s experience in private wealth, we examine each offering and look for ways to improve our client’s financial outcomes. Recently, we examined fee structures and have added an alternative to the AUM fee for our high-net-worth clients – performance-based fees.
Why?
Most commonly seen in the private equity and hedge fund world, we believe performance-based fees align our compensation to our client’s goals and demonstrate our duty to put our clients’ financial goals ahead of our own. By receiving a lower fee when the hurdle rate is not met and receiving a higher fee after the hurdle is achieved, our incentives are aligned with our clients’ success.
Performance-Based Fees
Elbert Capital Management’s performance-based fee structures are a combination of a significantly reduced AUM fee and a performance fee in which a portion of the profits of the account are shared with Elbert Capital above a specified hurdle rate, which is determined by the client’s risk tolerance. Available to Qualified Clients as defined by the SEC, we believe this structure allows Elbert Capital’s fee to be intimately connected to achieving our client’s goals as our fee collected significantly declines when asset performance is below the specified hurdle rate for the account.
Hurdle Rates
The hurdle rate by which performance of the account is compared can be dynamic or static. A dynamic hurdle rate is tied to a benchmark that is aligned with a client’s risk tolerance and may be best suited for investment management clients that are looking to attain a certain relative return on a portion of their investment portfolio. A static hurdle rate is tied to a client’s expected long-term rate of return, often determined by a financial plan, and may be best for clients that are looking to attain specified financial goals often defined in dollar amounts.
Qualified Clients as Defined by the SEC
The Securities and Exchange Commission (SEC) generally holds the viewpoint that performance-based fees can encourage investment advisers to take excessive risk. As a result, the SEC requires that clients who pay performance fees must be a “Qualified Client” defined as a natural person or company that:
- has at least $1,000,000 under management by the adviser; or
- has a net worth of more than $2,100,000 excluding their primary residence; or
- is a qualified purchaser as defined by the SEC.
Tired of Paying an AUM Fee?
If you’re a Qualified Client and you are interested in learning more about performance-based fees call us at 303-909-1858 or send us an email at jlinton@elbertcapital.com.
*Performance-based fees are only available to Qualified Clients. The above Qualified Client definition is current as of July 2019 and may be amended by the SEC and adjusted for inflation periodically.