PortfolioCenter automatically calculates returns both before and after expenses. While the portfolio value is always reduced by the amount of an expense, you control how the reductions impact performance returns. Your choices affect your gross and net performance returns.
When you begin working with PortfolioCenter, you should decide how you want to handle each expense type and then be consistent as you process your data. Here’s how it works:
- If you check only “Reduce Net,” the expense is treated as a withdrawal for the gross return, and as a loss for the net return. On Performance reports, the amount of the expense will appear under “Expenses.” (Management fees default to this option.)
- If you check neither “Reduce Gross” nor “Reduce Net,” the expense is treated as a withdrawal when calculating both gross and net returns. On Performance reports, the amount of the expense will appear under “Withdrawals”. (Federal Withholding defaults to this option.)
- If you check both “Reduce Gross” and “Reduce Net,” the expense is treated as a loss when calculating both gross and net returns. All other expense types (e.g margin expenses, accounting fees, foreign taxes) default to this option.
If you accept PortfolioCenter Expense defaults, how you post management fees in PortfolioCenter determines your net return.
Management fees taken from funds in the portfolio (internal fees) should be entered as expenses, not withdrawals and not “other expense”. Most brokers download management fees with the proper coding and you can post the transactions as is. If your broker downloads management fees as the generic “other expense”, you should change the expense type on each transaction to “management fees” before posting.
If your client pays management fees by sending you a check, it’s best to “tell” PortfolioCenter, so the net of fees return will be accurate. Management fees paid from outside the portfolio (external fees) can be entered using two transactions: a deposit of cash and a management fee . As long as these two transactions are on the same date for the same dollar amount, PortfolioCenter recognizes them as an external management fee.
Note: The one expense type many brokers miscode in their downloads is Federal Withholding. These transactions often appear in the downloads as the generic “other expense” but they should be changed to the expense type “Federal Withholding” if you use the PortfolioCenter defaults.