Fees
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What is a Fee?
A fee is a
fixed price that is charged for a specific service. Fees are charged in a variety of ways, including costs, charges, and commissions. It is most common for fees to be charged in the context of highly transactional services and as a substitute for salaries and wages.
More about Fees
Generally, fees are associated with transactional activities, particularly with professionals who provide services. When an individual hires a company to perform a specific task, such as cleaning a house or filing taxes, a fee may be charged. Because these fees represent payments for a specific service, they are often very transparent. There are many types of transaction fees, such as those associated with stock market transactions or those associated with money transfers.
Types of Fees
Fees come in a variety of forms. Fees are paid by individuals and businesses for a variety of reasons. Financial advisors charge a fee to help individuals select and manage investments, and real estate agents charge a fee when a family sells a home. An organization may pay an accountant to keep its books and a security company to ensure that its building is secure. Governments may charge fees to obtain a business license or an individual passport. Deposit fees may be charged by financial institutions, and overdraft fees may be charged by credit unions.
Fees in Wealth Management
Wealth management fees may be fixed or variable. Fixed asset management fees are most common. In this case, a fixed percentage per year is calculated based on the assets under management. It is common for actively managed asset management mandates to be charged a performance fee based on the asset manager's performance. Thus, the asset manager receives a portion of the profit generated for the clientele. Retrocessions (kick-backs, commissions, etc.) are another type of fee that can be charged. Nevertheless, these practices are no longer prevalent, particularly in Switzerland, since the Federal Supreme Court clarified in several leading cases that such income belongs to clients rather than to wealth managers, unless the clients expressly waive them, in which case they must be aware of their amount.
Due to the fact that each of the fee types has its own advantages and disadvantages, it is important, especially in wealth management, to ensure that the fee model is as balanced as possible, taking into account all aspects and incentives, so as to avoid conflict of interests.
Bank and Investment Fees
The fees charged by banks are rarely transaction-related, meaning that the account holder has not requested a service. A fee may be charged when an account is overdrawn or a credit card payment is late.
If a bank charges checking account holders a monthly fee, for instance, the fee has little to do with the cost of maintaining the account. Regulations targeting bank activities have reduced or eliminated traditional revenue sources, causing the banks to seek out alternate revenue sources.
There are a variety of fees that investors must pay when trading stocks, mutual funds, and options. There is often a per-trade fee associated with trading stocks, known as a transaction fee. In order to invest in mutual funds, an investor must bear costs such as the Total Expense Ratio (TER).
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