2013 CFA Mock PM Q 58 regarding custodial fees

Gross of fees means gross of investment mgmt fees and net of trading expenses, and since custodial fees are not part of trading expenses, we do not deduct custodial fees. So whats wrong with the treatment of custodial fees?

This stumped me as well. The section referenced in the answer (vol 6 reading 43 section 3.11) says nothing about custodial fees. In fact, on p.299 exhibit 15, there is an identical note (*) and that presentation is supposed to be GIPS compliant!

I think the guy in charge of mock answers was smoking something when writing #58. This should be in the errata.

(*) “Gross-of-fees returns are presented before management and custodial fees but after all trading expenses.”

EDIT: Also see EOC Q 26 answered on p 352. There is no mention that the “custodial fees” statement is either wrong or omits something.

Taken direct from CFAI 2010 GIPS compliance requirements: Custodial fees definition

The fees payable to the custodian for the safekeeping of PORTFOLIO assets. CUSTODY FEES are considered to be ADMINISTRATIVE FEES and typically contain an asset-based portion and a transaction-based portion. The CUSTODY FEE may also include charges for additional services, including accounting, securities lending, and/or performance measurement. Custodial fees that are charged per transaction SHOULD be included in the CUSTODY FEE and not included as part of TRADING EXPENSES.

Definition of Gross of fees

The return on investments reduced by any TRADING EXPENSES incurred during the period.

So custodial fees are deducted from gross returns because they are forms of admin fees?

Then what is the big fuss about custodials fees are NOT trading expenses…

CFAI seems to make random emphasis…

CPK please input some of your thoughs.

The answer is wrong. Go here to page 44 and look up the definition of custody fees http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2010.n5.1 and then go farther down and look up Gross of fees. I think the question is supposed to say most likley not least likely because they way they treat custodial fees is correct according to GIPS.

Cool stuff, thanks a lot

I know, being picky here, but I don’t think the answer is wrong, I think the problem set wording is wrong. Because with the existing wording, all choices are correct. My guess is the problem set should read “before investment management fees but after custodial fees and trading expenses.”

Gross of Fee = Return on investment - trading expenses

Net of Fee = Gross of fee - investment management fee

The answer is not wrong, it’s correct.

I concur with calcfa2011

The answer is definitely wrong… Gross of fee returns is before investment management fee and before custodial fees, but after tranding expenses (which do not include custodial fees as these are admin fees). The “issue” if any would be that the wording “sort of implies” Net of fee returns would be after investment management fees (which is correct) and after custodial fees (not correct)… Planning to send an email to CFAI…

nope, you are wrong as well.

how about you give some explanation as to why you think it is right…?

well calcfa2011 already answered it.

CFA Volume 6:

Page 274 - custody fees should not be considered direct trading expenses.

Page 330 - Gross of Fees Return is reduced by Trading Expenses

There is no need for further discussion. Move on.

Jmachine4, Next time quote who you disagree with or learn how to speak your native language… “i concur with calcfa2011” means that I agree with what calcfa2011 said. Plus, there’s no need to be so disagreeable.

Mr. mad’moiselle, YOU ARE CORRECT. I made the mistake of not reading your response carefully.

Please note an erratum will be posted later tonight on this question.

Questions 55 to 60 Global Investment Performance Standards Bud Walter Case Scenario: Note #4 in the vignette should read as follows:

  1. Gross-of-fees returns are presented before investment management fees but after custodial fees and trading expenses. All clients pay an investment management flat fee of 75 basis points on the month-end account value plus a 10 basis point performance fee whenever the composite return exceeds the benchmark return by 100 basis points.

Question #58: The question feedback should read as follows:

A is correct. Only direct trading expenses should be deducted in calculating gross-of-fees returns. Custodial fees should not be considered a component of direct trading expenses. Thus, gross-of-fees returns should be calculated before custodial fees are deducted, not after.

Ok so:

Gross of Fees = Return on investment - trading expenses

Net of Fees = Gross of fee - investment management fee - custodial fee?

Yes. I think of it as similar to gross profit/operating profit. The trading expenses are directly related to top line revenue and the operating expenses are not directly associated with one specific revenue producing activity.

Excellent job by the posters in this thread to get the Institute to update the Errata to this question. I had the same problem when I graded my mock exam and was just going through p.299 and p.338 in the Book 6 of the CFAI material when I stumbled upon this thread. Nice job!!!