Incentive Fee

AAA

DEFINITION of 'Incentive Fee'

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. Layered Fees

    Two sets of management fees that are paid by an investor for ...
  2. Incubated Fund

    A fund that is offered privately when it is first created. Investors ...
  3. Portfolio Manager

    The person or persons responsible for investing a mutual, exchange-traded ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  5. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
  6. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
Related Articles
  1. Mutual Funds & ETFs

    How To Pick A Good Mutual Fund

    Learn how to evaluate mutual funds and find the right one for you.
  2. Mutual Funds & ETFs

    Stop Paying High Mutual Fund Fees

    Discover how investment strategies and expense ratios impact your mutual fund's returns.
  3. Mutual Funds & ETFs

    Lower Your Fees With Mutual Fund Breakpoints

    The lower the sales charge you pay, the greater your returns. Find out how to cash in.
  4. Markets

    Get Tough On Management Puff

    Company managers are often skilled at fooling investors. Be critical and don't believe the hype.
  5. Mutual Funds & ETFs

    That's A (Mutual Fund) Wrap!

    These advisory programs offer professional supervision and other handy tools for building a diversified portfolio.
  6. Options & Futures

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  7. Investing Basics

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  8. Investing Basics

    5 Tips For Investing In IPOs

    It’s not easy to profit from IPO​s, but the money is there.
  9. Investing Basics

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  10. Investing News

    Fund Firm Jolts: Pimco's Isn't The First Or Worst

    When you business is built on prudence and trust, a lot can go wrong to cost you tons of clients and assets. Here are a few examples.
RELATED FAQS
  1. What are some mutual funds that do not have 12b-1 fees?

    Some of the most popular and best-performing mutual funds that do not include any 12b-1 fees in the expenses charged to fund ... Read Full Answer >>
  2. What action is the SEC likely to take on 12b-1 fees?

    The Securities and Exchange Commission (SEC) may take action to impose greater regulation on how 12b-1 fees are used, or ... Read Full Answer >>
  3. What is considered a reasonable 12b-1 fee?

    A reasonable 12b-1 fee is generally considered to be 0.25% of the assets of the mutual fund. The maximum amount allowed for ... Read Full Answer >>
  4. What is the 12b-1 fee meant to cover?

    A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>
  5. What happens when I want to sell my A-shares of a mutual fund?

    Typically, commissions or other sales charges may apply when a mutual fund is sold. This is an important factor in deciding ... Read Full Answer >>
  6. How can a mutual fund raise or lower its turnover ratio?

    A mutual fund manager can raise or lower the fund's turnover ratio by increasing or decreasing its level of trading activity ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!