Typical Earnings of Index Funds

Index funds aim to replicate the performance of a specific market index, such as the S&P 500, FTSE 100, or MSCI World, by investing in the same securities as the index. Their performance closely mirrors the underlying benchmark, minus minimal fees. The typical returns for index funds depend on the market index they track and the timeframe:

Historical Annual Returns:

• S&P 500 Index: Approximately 7%-10% per year (adjusted for inflation) over the long term.
• Global Indexes (e.g., MSCI World): Around 6%-8% annually over a multi-decade period.
• Emerging Market Indexes: Tend to provide higher returns (8%-12% annually) due to increased risk and volatility.

Factors Affecting Returns:

• Market volatility, interest rates, and macroeconomic trends.
• Minimal fees (0.03%–0.50% annually), ensuring investors retain most of the index’s performance.

Index funds, while low-cost and reliable, typically deliver average market returns over a long investment horizon. Wealth management models based on active strategies must justify higher fees by achieving superior performance above these benchmarks.

Typical Earnings of our Clients

For wealth management strategies to appeal to our clients, their earnings should outperform index funds consistently  ensuring net client returns exceed index fund benchmarks (7%-10%).

Key Adjustments to Outperform Index Funds

1. Higher Gross Returns: Wealth managers must aim for 12%-15% gross annual returns, significantly above typical index fund returns (7%-10%).
2. Benchmark-Linked Fees: Performance fees tied to benchmarks (e.g., inflation + 3% or S&P 500 depending on risk appetite) demonstrate transparency and ensure clients benefit from active management.
3. Customised Risk Strategies: Active wealth management focuses on strategies that outperform in varied market conditions, such as sector rotations, tactical allocations, and alternative investments.
4. Lower Fixed Costs: Competitive management fees (1%-1.5%) reduce the drag on returns, making active management more attractive relative to low-cost index funds.

“2 and 20” Model 

 Structure: 

• 2% Management Fee annually on AUM. 
• 20% Performance Fee on profits exceeding a benchmark index return (e.g., S&P 500 or inflation + 3%). 

 
Target Returns: 

• 12%-15% annual gross returns, ensuring clients achieve 9%-11% net returns after fees. 
  
  

Minimum Investment Horizon: 

• 3-5 years. This timeframe allows for steady growth and periodic rebalancing while reducing the impact of short-term market fluctuations. 
  
  

 Example: 

• A $1 million portfolio achieving a 15% gross return ($150,000): 
• $20,000 management fee (2% of AUM). 
• $28,000 performance fee (20% of profits above a 10% benchmark). 
•  Net client return: 10.2%. 

 
Rationale: 

• Designed for clients with a medium- to long-term focus, seeking significant outperformance over index funds. 
• Aligns manager and client incentives by rewarding sustained strong performance. 

“1,5 and 15” Model 

Structure: 

• 1.5% Management Fee annually on AUM. 
• 15% Performance Fee on profits exceeding a benchmark return (e.g., MSCI World or inflation + 2.5%). 

 
Target Returns: 

• 10%-13% annual gross returns, ensuring clients achieve 8%-10% net returns after fees. 

 
Minimum Investment Horizon: 

• 5-7 years. This allows sufficient time for the active strategy to outperform market benchmarks and recover from short-term volatility. 

Example: 

• A $500,000 portfolio achieving a 12% gross return ($60,000): 
• $7,500 management fee (1.5% of AUM). 
• $4,500 performance fee (15% of profits above an 8% benchmark). 
• Net client return: 9.6%. 

 
Rationale: 

• Attractive for cost-sensitive clients with a medium-term focus, seeking competitive returns above benchmarks without excessive fees. 

Performance-Only Model 

 Structure: 

• No management fee. 
• A 30%-40% Performance Fee on profits exceeding a benchmark index return. 

 
Target Returns: 

• 12%-16% annual gross returns, ensuring clients achieve 8%-10% net returns after fees. 

 

Minimum Investment Horizon: 

• 7-10 years. This longer horizon is necessary to balance the high performance fees and provide sufficient time for the active strategy to demonstrate consistent outperformance. 

 
Example: 

• A $300,000 portfolio achieving a 14% gross return ($42,000): 
• $12,600 performance fee (30% of profits above a 10% benchmark). 
• Net client return: 10%. 

 
Rationale: 

• Best suited for clients with a high-risk tolerance and long-term focus, as the significant performance fees can reduce short-term returns. 

Clawback Fee Model 

 Structure: 

• 1%-1.5% Management Fee with performance fees adjusted or refunded for losses in subsequent periods. 

 
Target Returns: 

• 10%-13% annual gross returns, ensuring clients achieve 8%-10% net returns after fees. 

Minimum Investment Horizon: 

• 10+ years. Long-term engagement allows the wealth manager to balance periods of gains and losses while implementing clawback adjustments effectively. 

 

Example: 

• A $400,000 portfolio achieving a 12% gross return ($48,000): 
• $6,000 management fee (1.5% of AUM). 
• $4,800 performance fee (10% of realised profits). 
• If losses occur in the following year, fees are adjusted proportionally. 
• Net client return: approx. 9% after fees. 

 
Rationale: 

• Provides fairness to clients, ensuring long-term alignment and protecting against market volatility, making it ideal for conservative or risk-averse investors.