In the world of investments, transparency becomes as essential as air is to humans.
WealthDesk believes in providing a transparent subscription fee structure to our users and WealthBasket Managers. We here highlight how we calculate the fees which a user pays to the WealthBasket Manager.
Please note that the WealthBasket Manager charges the subscription fee to provide our users with research and advisory services. WealthDesk as a platform charges no additional fee to the users.
A Registered Investment Advisor (RIA) can charge fees to their customers on either a fixed fee basis or a percentage basis. This percentage is based on the Assets Under Advisory (AUA).
What is Assets Under Advisory (AUA)?
It is the summation of the market value of the assets parked with a WealthBasket Manager at any point in time. For Example: If you invest ₹1,00,000 in a WealthBasket today, today’s AUA in this WealthBasket will be ₹1,00,000.
When an RIA opts for charging fees on a fixed basis, it is straightforward. However, when the RIA opts for charging it on a percentage basis, we need to look at a concept called Rolling AUA.
What is Rolling AUA?
The Rolling AUA is the average daily value of the investment. It is calculated as the sum of the market value of invested instruments each day over a time period divided by the number of trading days in the same time period.
The regulations state that
- In the case of percentage-based fees, RIAs cannot charge more than 2.5% per annum of the AUA
- They can charge a maximum of 2 quarters of fees in advance
The amount that WealthBasket investors pay will ultimately be the fees being charged by the WealthBasket Manager. For e.g. A WealthBasket Manager may charge only 1% of AUA per annum.
When the WealthBasket Manager charges a part of the subscription fee in advance, we ensure that the investors do not end up paying more than the fee set by the RIAs and regulations for the year through the Rolling AUA mechanism.
The Rolling AUA fee kicks in at the subscription renewal of your WealthBasket Investment. Let’s take 2 examples to understand how Rolling AUA based fee works.
If the Rolling AUA is higher than the invested amount
Let us understand with an example.
On 1st January 2021, Ms Sharma (fictional name) invested ₹1,00,000 in a WealthBasket which charges a subscription fee of 0.5% quarterly.
She pays a subscription fee of ₹500 (0.5% of 1,00,000) on 1st January 2021 to the WealthBasket Manager for 3 months of investment management, i.e. from 1st January 2021 to 31st March 2021 (Since this is the first quarter of 2021, let’s call it 2021-Q1)
On 1st April 2021, when the WealthBasket subscription is up for renewal, WealthDesk will use the following numbers to calculate the total payable amount of the renewal subscription fee for the upcoming term, i.e. from 1st April 2021 to 30th June 2021 (2021-Q2).
- Current Investment Value
Say the value of WealthBasket investment as of 1st April 2021 is ₹1,50,000. The increase may be attributed to the good performance of the WealthBasket and/or more funds added by the user in this time period.
- Subscription fee for the upcoming term
The fee to be paid for the upcoming term 2021 Q2 (i.e. 1st April 2021 to 30th June 2021), again as advance for this period, is computed as 0.5% of the current investment value, which comes out to ₹750 (0.5% of ₹1,50,000).
So far, so good! Now comes rolling AUA, where we adjust the subscription fee for the WealthBasket’s Rolling AUA of the prior term, i.e. 2021-Q1, in the fee of the upcoming term.
- Rolling AUA for Prior Term
First, the Average Daily Value of the WealthBasket investment, a.k.a. Rolling AUA of the prior term, will be calculated for 2021-Q1. Let’s say it came out to be ₹1,20,000.
- Actual Subscription fee for Prior term adjusted for Rolling AUA
Since the WealthBasket Manager managed ₹1,20,000 on average for 2021-Q1, he should have been paid 0.5% of this (₹600) as the subscription fee for 2021-Q1.
- Subscription fee already paid for the prior term
On 1st January 2021, Ms Sharma had already paid in advance ₹500 as the subscription fee for 2021-Q1. Essentially Ms Sharma should pay ₹100 more as the Rolling AUA has been higher than the amount invested.
Total subscription fee payable as of 1st April 2021 will be the upcoming term’s fee (B) + fee adjustment for the prior term (D-E) = ₹750 + ₹600 – ₹500 = ₹850
With the Rolling AUA fees, the investors pay the WealthBasket Managers based on the average value of the assets during the term.
However, what happens if the WealthBasket investment value has gone down for the 2021-Q1 period, i.e. Rolling AUA for the prior term (2021-Q1) is lower than the amount invested?
If the Rolling AUA is lower than the invested amount
Let’s understand this case by taking the same example of Ms Sharma as above.
On 1st April 2021, when the WealthBasket subscription is up for renewal, WealthDesk uses the following numbers to calculate the renewal subscription fee for 1st April 2021 to 30th June 2021 (2021-Q2).
- Current Investment Value
Say the current value of WealthBasket investment as of 1st April 2021 is ₹80,000. This can be attributed to performance decline, or the user might have withdrawn some funds (subject to some conditions).
- Subscription fee for the upcoming term
The fee to be paid for the upcoming term 2021 Q2 (i.e. from 1st April 2021 to 30th June 2021) is computed as 0.5% of the current investment value, which comes out as ₹400.
Now we bring the concept of rolling AUA, where we adjust the subscription fee for the WealthBasket based on the Rolling AUA of the prior term, i.e. 2021-Q1.
- Rolling AUA for Prior Term
First, the Average Daily Value of the WealthBasket investment, a.k.a. Rolling AUA, will be calculated for 2021-Q1. Let’s say it is ₹90,000.
- Actual Subscription fee for Prior term adjusted for Rolling AUA
Since the WealthBasket Manager has managed ₹90,000 on an average for 2021-Q1, he should have been paid 0.5% of this (₹450) as the subscription fee for 2021-Q1.
- Subscription fee already paid for the prior term
On 1st January 2021, Ms Sharma had already paid in advance ₹500 as the subscription fee for 2021-Q1. Essentially Ms Sharma has paid an excess of ₹50, which must be adjusted in the subscription fee for the upcoming term.
The total subscription fee payable as of 1st April 2021 will be the upcoming term’s fee (B) + fee adjustment for the prior term (D-E) = ₹400 + ₹450 – ₹500 = ₹350
In this case, the lower Rolling AUA of the prior term has been adjusted in the subscription fee for the next term.
Conclusion
For investors, the Rolling AUA will ensure that they pay fees to the WealthBasket Managers as per the average value of their WealthBasket Investments, nothing more, nothing less. Also, in order to achieve complete transparency, the users are sent the detailed calculations of the fees charged to them in the invoice for more clarity and understanding.
