Within the IBKR platform, financial advisors can charge their clients using automatic billing methods or manual electronic invoices. This video will review the Percentage of P&L method with is one of the automatic billing methods available to financial advisors.
As a reminder, the automated billing structures are calculated in arrears meaning that the fee is charged to the client account at the end of the payment period. Fees Templates can be configured by opening the left side menu, expanding Administration & Tools, expanding Fees & Invoicing, and selecting Fee Templates. For more information on configuring fee templates, please see our Introduction to Advisor Client Billing video.
For this video, the advisor will edit the fee structure for an existing client by selecting the Fees from the left side menu, then selecting the client from the Account Selector, and clicking the pencil Edit icon in the upper right corner.
Performance Fee: Percentage of P&L Method
The Percentage of P&L method is a performance-based fee where the advisor is charging a percentage of the profits for the period. The performance fee is configured in the base currency of the advisor account. Two periods may be specified for this calculation – Quarterly or Yearly. Th maximum percentage fee that can be charged is 30%.
Can thresholds be configured for performance fees?
Advisors can also specify a threshold that the account’s performance must exceed for the fee to be assessed. Select Yes to configure a threshold and the advisor can enter a static, fixed number or select an index or ETF benchmark as the threshold. If the P&L surpasses the threshold, the fee will be assessed on the surplus return above the threshold.
For example, if the Advisor charges an annual performance fee of 20% and sets an 8% threshold, the advisor would not be paid a fee if the client account’s annual money weighted return is less than or equal to 8%.
If the account’s return for the year was 30%, the advisor will receive a 20% performance fee on the excess return. So, 30% minus the 8% benchmark equals 22% in excess return and the advisor would capture their 20% fee on that excess return.
Note that deposits and withdrawals are not included in the calculation of P&L, instead the “P&L” represents the change-in-equity due to business activity like trading, commissions, dividends, interest, variation margin, and so on.
Can advisors offset prior periods of losses for performance fees?
Additionally, advisors can apply High Water Marking to the billing period to offset periods of losses in a volatile market. Select Yes to configure the High Water Mark and specify the number of look-back periods (in quarters or years, based on the period selection in the Percent of P&L fee schedule).
High Water Marking keeps track of cumulative losses per billing period within the specified look-back period. A loss in any period will be added to the look-back period’s cumulative losses. A gain in any period will decrease the cumulative loss recorded to date. Advisors cannot charge a profit-based fee as long as a cumulative loss exists. By default, the look-back period is zero.
The advisor can also choose to pro-rate the prior losses for withdrawals. If an advisor chooses to prorate, withdrawals in the current period reduce any cumulative losses that are carried over from previous periods. The losses are reduced in proportion to the percentage of equity that was withdrawn.
Additionally, the advisor can initialize High Water Marking with previous periods’ losses by manually entering the amount of the losses. These losses may have been incurred for the client in another account, or with another advisor, or at another custodian.
Like other automated fee methods on IBKR’s platform, the performance fee will not be effective until the client approves the fee schedule. Any changes made to the fee during a period will only be applied on a forward-looking basis and will not be applied retroactively.
Please see our website for more information on the formulas used in the fee calculations as well as helpful examples.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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