Incentive Fee

What is an 'Incentive Fee'

An incentive fee is a fee paid to a fund manager by investors. Incentive fees are typically dependent upon the manager's performance over a given period and are usually taken in relation to a benchmark index. For instance, a fund manager may receive an incentive fee if his or her fund outperforms the S&P 500 Index over a calendar year, and may increase as the level of outperformance grows.

BREAKING DOWN 'Incentive Fee'

Incentive fees are usually in place to tie a manager's compensation to their level of performance, more specifically their level of financial return. However, such fees can sometime lead to increased levels of risk taking, as managers attempt to increase incentive levels through riskier ventures than outlined in a fund's prospectus.

RELATED TERMS
  1. Performance Fee

    A payment made to a fund manager for generating positive returns. ...
  2. Exchange Fees

    A type of investment fee that some mutual funds charge to shareholders ...
  3. Management Fee

    A charge levied by an investment manager for managing an investment ...
  4. Clearing Fee

    A fee charged by a clearing house for its services. A clearing ...
  5. Cumulative Discount Privilege

    A way that an investor in a mutual fund can qualify for lowered ...
  6. Garbage Fees

    Unnecessary fees tacked onto mortgage closing costs by lenders ...
Related Articles
  1. Mutual Funds & ETFs

    A Guide To Investor Fees

    Fees are one of the most important determinants of investment performance and something that every investor should know.
  2. Investing Basics

    Are Fees Eating Up Your Nest Egg?

    You may not be able to avoid all fees associated with retirement planning, but you should know what you’re being charged for. Here's a list of common fees.
  3. Investing Basics

    How To Optimize Your Portfolio and Reduce Fees

    Investment fees aren't avoidable altogether, but there are strategies investors can employ to keep those fees at bay and reduce the impact on returns.
  4. Retirement

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  5. Investing Basics

    5 Signs Fund Fees Are Hammering Your Investments

    The worst long-term killer of investment gains isn’t the market; it’s fees, especially for retirement accounts. How do you know if you're paying too much?
  6. Mutual Funds & ETFs

    Mutual Funds: Management Fees Vs. MER

    Having a clear understanding of the fees charged by a mutual fund is a significant component to making an informed investment decision. Often the management fee is used interchangeably with the ...
  7. Personal Finance

    Are Financial Advisor Fees Too High?

    Fees charged by financial advisors run the gamut. Are you getting a fair deal or paying too much?
  8. Mutual Funds & ETFs

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
  9. Investing Basics

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  10. Mutual Funds & ETFs

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
RELATED FAQS
  1. What's the difference between the hurdle rate and the high water mark?

    Discover how hurdle rates and high water marks are used by hedge funds for calculating incentive or performance fees charged ... Read Answer >>
  2. Why do mutual fund companies charge management fees?

    Learn why mutual funds charge their investors management fees, which include the cost of hiring investment advisors and various ... Read Answer >>
  3. Why is a mutual fund's expense ratio important to investors?

    Understand the nature of mutual fund expense ratios, and learn why it is critically important for investors to be aware of ... Read Answer >>
  4. How do mutual fund expense ratios affect returns?

    Learn what kinds of mutual fund fees there are, how to find out what fees your funds have and how they impact the future ... Read Answer >>
  5. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
  6. Where do I look for fees that I am charged on investments? What are those fees called?

    The fees and expenses charged for investments vary. The fees usually depend on the type of investment and the investment ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center