Question

4 pavan receives $50,000 as a gift from his father. he calls his advisor to discuss investing the amount in segregated funds. while discussing the limitations of the investment, his advisor mentions sales charges and the management expense. pavan wants to know how the management expense differs from the sales charge. which of the following explanations about the management expense will the advisor provide to pavan?
a. the management expense is a percentage applied against the amount withdrawn.
b. the management expense includes operating expenses and taxes.
c. the management expense is fixed and cannot be changed by the insurer.
d. the management expense ratios do not affect investor returns.

Explanation:

• Option a: Management expense is typically a percentage of the fund's assets, not the amount withdrawn, so a is incorrect.
• Option b: Management expense in segregated funds (or investment funds) includes operating expenses (like administrative costs, fund management costs) and can include taxes related to the fund's operations, so this is a correct explanation.
• Option c: Management expense ratios can be changed by the insurer (or fund manager) based on operational needs, so c is incorrect.
• Option d: Management expense ratios directly affect investor returns as they are deducted from the fund's assets, reducing the net return to investors, so d is incorrect.

Answer:

b. The management expense includes operating expenses and taxes.