Within the IBKR platform, financial advisors can charge their clients using automatic billing methods or manual electronic invoices. The Percentage of P&L method, one of the automatic billing methods available, automates billing structures are calculated in arrears, meaning the fee is charged at the end of the payment period. Advisors can configure Fee Templates through the Fees & Invoicing section within the Administration & Tools menu (IBKR Traders´Academy, s.f.).
- Performance Fee: Percentage of P&L Method
The Percentage of P&L method is a performance-based fee where advisors charge a percentage of the profits for the period. This fee is configured in the base currency of the advisor account and can be calculated quarterly or yearly, with a maximum allowable fee of 30%. Advisors can specify a threshold that the account’s performance must exceed for the fee to be assessed. This threshold can be a static number or an index/ETF benchmark (IBKR Traders´Academy, s.f.). The fee is then assessed on the surplus return above this threshold. For example, with a 20% annual performance fee and an 8% threshold, if the client’s annual return is 30%, the advisor charges 20% on the 22% excess return above the 8% threshold.
- High Water Marking and Loss Offset
Advisors can apply High Water Marking to offset periods of losses in volatile markets. This method keeps track of cumulative losses within a specified look-back period (quarters or years). As long as there are cumulative losses, advisors cannot charge a profit-based fee. Losses from previous periods can also be carried over and pro-rated for withdrawals. Advisors can initialize High Water Marking with previous periods’ losses by manually entering the loss amounts.
- Client Approval and Fee Application
Like other automated fee methods on IBKR’s platform, the performance fee schedule requires client approval to be effective. Any changes made to the fee during a period will only be applied on a forward-looking basis and will not be applied retroactively. This ensures transparency and compliance with client agreements. For more detailed information on formulas and examples, advisors are encouraged to refer to additional resources on the IBKR website.