Sorry! Gotta Talk About Fees Again.

Rip West on

I just checked the search feature on bivio. Have you ever done that? It's a very handy way to find everything written about a certain topic. I searched on the word, 'fee'. There were three pages of references, including a lot of help documents and IRS publications. I had my share, though - at least seven articles on the topic, and Jerry probably had as many. So, why write one more, you may well ask. Is this going to be any improvement on the other seven? I certainly hope so, but the main impetus for writing another column is that bivio has changed the way investment clubs use fees, and that is worth talking about.

Review time! What are the different ways that investment clubs use fees?

Withdrawal fee. Used to compensate a club for costs of terminating a partner and/or to discourage members from casually dropping in and out of clubs.
Penalty. Used to fine members for late payments. Also used to reimburse a club for charges caused by one member, such as a NSF check charge from a bank.
Work-around. Traditionally, this has been used by accounting programs for investment clubs to endeavor to spread the burden of certain expenses equally among the partners, rather than proportionately by ownership units. This is the one we will be examining in more detail.
Start-up fees. When a club first starts, it can incur costs for software, supplies, etc.
Administrative fees. Some clubs feel the need to separate administration from investment.

Ok. Some of these we can polish off in a hurry. Others will take a little more effort. I am neither for nor against withdrawal fees - Number 1 above. This is a matter to be decided by each club. There is no right or wrong.

I am in favor of Number 2 - penalty fees. Certainly, if a member's NSF check causes the club to incur a bank charge, the member should reimburse the club, and the use of fees offers the most advantageous way to do that from a tax standpoint. I don't have any real strong feeling about the use of late fees to penalize members who get their monthly payments in late. My personal preference is just to establish a cut off date, and deposit checks that come in after that date with next month's payments. This works well in a rising market - not too well in a falling one.

Start-up fees aren't as big as they used to be now that bivio is offering free accounting and tax preparation. However, there still can be substantial expenses at the start, which will hit the original. I don't find anything wrong with charging all new members a modest fee to recognize that fact.

I am violently and vehemently against trying to separate the administrative function from the investment function, and assessing fees to cover administrative expenses. Some clubs are just as adamant about espousing a real need for this. I'm not going to argue the point here, other than to say that if you do charge fees to represent your administrative expenses, be sure that these fees closely match the expenses they are to cover. Otherwise, a real distortion can occur between members' values. For further information on this read

Payments vs. Fees

http://www.bivio.com/trez_talk/mail-msg?t=518700003

Well, I have reached the end of the article, and I still haven't touched on the one thing that prompted me to write. That is the use of fees to spread the burden equally between members. This will be covered in a separate article, entitled 'Equal Allocation of Expenses'. You can search for it, or just find it somewhere in the list fairly close to this one.

As always, I encourage all readers to chime in with comments, criticisms, bravos [especially bravos], and/or whatever.

Rip West
Saint Paul, MN
trez_talk@bivio.com

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