What is the Average Daily Balance Method?

The average daily balance is a common accounting method that calculates interest charges by considering the balance invested or owed at the end of each day of the billing period, rather than the balance invested or owed at the end of the week, month, or year.

Understanding the Average Daily Balance Method

The federal Truth-In-Lending-Act (TILA) requires lenders to disclose their method of calculating finance charges, as well as annual percentage rates (APR), fees, and other terms, in their terms and conditions statement. Providing these details makes it easier to compare different credit cards.

TILA permits the interest owed on credit card balances to be calculated in various different ways. The most common methods are:

• Average daily balance method: Uses the balance on each day of the billing cycle, rather than an average balance throughout the billing cycle, to calculate finance charges.
• Previous balance method: Interest charges are based on the amount owed at the beginning of the previous month’s billing cycle.
• Adjusted balance method: Bases finance charges on the amount(s) owed at the end of the current billing cycle after credits and payments have been posted.

How the Average Daily Balance Method Works

The average daily balance totals each day’s balance for the billing cycle and divides by the total number of days in the billing cycle. Then, the balance is multiplied by the monthly interest rate to assess the customer’s finance charge—dividing the cardholder’s APR by 12 calculates the monthly interest rate. However, if the lender or card issuer uses a method that compounds interest daily, the interest associated with the day’s ending balance gets added to the next day’s beginning balance. This will result in higher interest charges and the reader should confirm which method is being used.

The average daily balance credits a customer’s account from the day the credit card company receives a payment. To assess the balance due, the credit card issuer sums the beginning balance for each day in the billing period and subtracts any payments as they arrive and any credits made to the customer’s account that day.

Cash advances are usually included in the average daily balance. The total balance due may fluctuate daily because of payments and purchases.

Average Daily Balance Method Example

A credit card has a monthly interest rate of 1.5 percent, and the previous balance is $500. On the 15th day of a billing cycle, the credit card company receives and credits a customer’s payment of $300. On the 18th day, the customer makes a $100 purchase.

The average daily balance is ((14 x 500) + (3 x 200) + (13 x 300)) / 30 = (7,000 + 600 + 3,900) / 30 = 383.33. The bigger the payment a customer pays and the earlier in the billing cycle the customer makes a payment, the lower the finance charges assessed. The denominator, 30 in this example, will vary based on the number of days in the billing cycle for a given month.

Average Daily Balance Method Vs. Adjusted Balance Method Vs. Previous Balance Method

Interest charges using the average daily balance method should be lower than the previous balance method, which charges interest based on the amount of debt carried over from the previous billing cycle to the new billing cycle. On the other hand, the average daily balance method will likely incur higher interest charges than the adjusted balance method because the latter bases finance charges on the current billing period’s ending balance.

Card issuers use the adjusted balance method much less frequently than either the average daily balance method or the previous balance method.

Special Considerations

Some credit card companies previously used the double-cycle billing method, assessing a customer’s average daily balance over the last two billing cycles.

Double-cycle billing can add a significant amount of interest charges to customers whose average balance varies greatly from month to month. The Credit CARD Act of 2009 banned double-cycle billing on credit cards.

What Is Annual Percentage Rate (APR)?

Annual percentage rate (APR) refers to the yearly interest generated by a sum that’s charged to borrowers or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. This includes any fees or additional costs associated with the transaction but does not take compounding into account. The APR provides consumers with a bottom-line number they can compare among lenders, credit cards, or investment products.

How the Annual Percentage Rate (APR) Works

An annual percentage rate is expressed as an interest rate. It calculates what percentage of the principal you’ll pay each year by taking things such as monthly payments and fees into account. APR is also the annual rate of interest paid on investments without accounting for the compounding of interest within that year.

The Truth in Lending Act (TILA) of 1968 mandates that lenders disclose the APR they charge to borrowers. Credit card companies are allowed to advertise interest rates on a monthly basis, but they must clearly report the APR to customers before they sign an agreement.

How Is APR Calculated?

APR is calculated by multiplying the periodic interest rate by the number of periods in a year in which it was applied. It does not indicate how many times the rate is actually applied to the balance.

$\begin{aligned} &\text{APR} = \left ( \left ( \frac{ \frac{ \text{Fees} + \text{Interest} }{ \text {Principal} } }{ n } \right ) \times 365 \right ) \times 100 \\ &\textbf{where:} \\ &\text{Interest} = \text{Total interest paid over life of the loan} \\ &\text{Principal} = \text{Loan amount} \\ &n = \text{Number of days in loan term} \\ \end{aligned}$​APR=((nPrincipalFees+Interest​​)×365)×100where:Interest=Total interest paid over life of the loanPrincipal=Loan amountn=Number of days in loan term​

Types of APRs

Credit card APRs vary based on the type of charge. The credit card issuer may charge one APR for purchases, another for cash advances, and yet another for balance transfers from another card. Issuers also charge high-rate penalty APRs to customers for late payments or violating other terms of the cardholder agreement. There’s also the introductory APR—a low or 0% rate—with which many credit card companies try to entice new customers to sign up for a card.

Bank loans generally come with either fixed or variable APRs. A fixed APR loan has an interest rate that is guaranteed not to change during the life of the loan or credit facility. A variable APR loan has an interest rate that may change at any time.

The APR borrowers are charged also depends on their credit. The rates offered to those with excellent credit are significantly lower than those offered to those with bad credit.

APR vs. Annual Percentage Yield (APY)

Though an APR only accounts for simple interest, the annual percentage yield (APY) takes compound interest into account. As a result, a loan’s APY is higher than its APR. The higher the interest rate—and to a lesser extent, the smaller the compounding periods—the greater the difference between the APR and APY.

Imagine that a loan’s APR is 12%, and the loan compounds once a month. If an individual borrows $10,000, their interest for one month is 1% of the balance, or $100. That effectively increases the balance to $10,100. The following month, 1% interest is assessed on this amount, and the interest payment is $101, slightly higher than it was the previous month. If you carry that balance for the year, your effective interest rate becomes 12.68%. APY includes these small shifts in interest expenses due to compounding, while APR does not.

Here’s another way to look at it. Say you compare an investment that pays 5% per year with one that pays 5% monthly. For the first month, the APY equals 5%, the same as the APR. But for the second, the APY is 5.12%, reflecting the monthly compounding.

Given that an APR and a different APY can represent the same interest rate on a loan or financial product, lenders often emphasize the more flattering number, which is why the Truth in Savings Act of 1991 mandated both APR and APY disclosure in ads, contracts, and agreements. A bank will advertise a savings account’s APY in a large font and its corresponding APR in a smaller one, given that the former features a superficially larger number. The opposite happens when the bank acts as the lender and tries to convince its borrowers that it’s charging a low rate. A great resource for comparing both APR and APY rates on a mortgage is a mortgage calculator.

APR vs. APY Example

Let’s say that XYZ Corp. offers a credit card that levies interest of 0.06273% daily. Multiply that by 365, and that’s 22.9% per year, which is the advertised APR. Now, if you were to charge a different $1,000 item to your card every day and waited until the day after the due date (when the issuer started levying interest) to start making payments, you’d owe $1,000.6273 for each thing you bought.

To calculate the APY or effective annual interest rate—the more typical term for credit cards—add one (that represents the principal) and take that number to the power of the number of compounding periods in a year; subtract one from the result to get the percentage:

$\begin{aligned} &\text{APY} = (1 + \text{Periodic Rate} ) ^ n – 1 \\ &\textbf{where:} \\ &n = \text{Number of compounding periods per year} \\ \end{aligned}$​APY=(1+Periodic Rate)n−1where:n=Number of compounding periods per year​

In this case your APY or EAR would be 25.7%:

$\begin{aligned} &( ( 1 + .0006273 ) ^ {365} ) – 1 = .257 \\ \end{aligned}$​((1+.0006273)365)−1=.257​

If you only carry a balance on your credit card for one month’s period, you will be charged the equivalent yearly rate of 22.9%. However, if you carry that balance for the year, your effective interest rate becomes 25.7% as a result of compounding each day.

APR vs. Nominal Interest Rate vs. Daily Periodic Rate

An APR tends to be higher than a loan’s nominal interest rate. That’s because the nominal interest rate doesn’t account for any other expense accrued by the borrower. The nominal rate may be lower on your mortgage if you don’t account for closing costs, insurance, and origination fees. If you end up rolling these into your mortgage, your mortgage balance increases, as does your APR.

The daily periodic rate, on the other hand, is the interest charged on a loan’s balance on a daily basis—the APR divided by 365. Lenders and credit card providers are allowed to represent APR on a monthly basis, though, as long as the full 12-month APR is listed somewhere before the agreement is signed.

Disadvantages of Annual Percentage Rate (APR)

The APR isn’t always an accurate reflection of the total cost of borrowing. In fact, it may understate the actual cost of a loan. That’s because the calculations assume long-term repayment schedules. The costs and fees are spread too thin with APR calculations for loans that are repaid faster or have shorter repayment periods. For instance, the average annual impact of mortgage closing costs is much smaller when those costs are assumed to have been spread over 30 years instead of seven to 10 years.

APR also runs into some trouble with adjustable-rate mortgages (ARMs). Estimates always assume a constant rate of interest, and even though APR takes rate caps into consideration, the final number is still based on fixed rates. Because the interest rate on an ARM will change when the fixed-rate period is over, APR estimates can severely understate the actual borrowing costs if mortgage rates rise in the future.

Mortgage APRs may or may not include other charges, such as appraisals, titles, credit reports, applications, life insurance, attorneys and notaries, and document preparation. There are other fees that are deliberately excluded, including late fees and other one-time fees.

All this may make it difficult to compare similar products because the fees included or excluded differ from institution to institution. In order to accurately compare multiple offers, a potential borrower must determine which of these fees are included and, to be thorough, calculate APR using the nominal interest rate and other cost information.

The Bottom Line

The APR is the basic theoretical cost or benefit of money loaned or borrowed. By calculating only the simple interest without periodic compounding, the APR gives borrowers and lenders a snapshot of how much interest they are earning or paying within a certain period of time. If someone is borrowing money, such as by using a credit card or applying for a mortgage, the APR can be misleading because it only presents the base number of what they are paying without taking time into the equation. Conversely, if someone is looking at the APR on a savings account, it doesn’t illustrate the full impact of interest earned over time.

APRs are often a selling point for different financial instruments, such as mortgages or credit cards. When choosing a tool with an APR, be careful to also take into account the APY because it will prove a more accurate number for what you will pay or earn over time. Though the formula for your APR may stay the same, different financial institutions will include different fees in the principal balance. Be aware of what is included in your APR when signing any agreement.

What Is Antitrust?

Antitrust laws are regulations that encourage competition by limiting the market power of any particular firm. This often involves ensuring that mergers and acquisitions don’t overly concentrate market power or form monopolies, as well as breaking up firms that have become monopolies.

Antitrust laws also prevent multiple firms from colluding or forming a cartel to limit competition through practices such as price fixing. Due to the complexity of deciding what practices will limit competition, antitrust law has become a distinct legal specialization.

Understanding Antitrust

Antitrust laws are the broad group of state and federal laws that are designed to make sure businesses are competing fairly. The “trust” in antitrust refers to a group of businesses that team up or form a monopoly to dictate pricing in a particular market.

Supporters say antitrust laws are necessary and that competition among sellers gives consumers lower prices, higher-quality products and services, more choices, and greater innovation. Most people agree with this concept and the benefits of an open marketplace, although there are some who claim that allowing businesses to compete as they see fit would ultimately give consumers the best prices.

The Antitrust Laws

The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the key laws that set the groundwork for antitrust regulation. Predating the Sherman Act, the Interstate Commerce Act was also beneficial in establishing antitrust regulations, although it was less influential than some of the others.

Congress passed the Interstate Commerce Act in 1887 in response to growing public demand that railroads be regulated. Among other requirements, the law ordered railroads to charge a fair fee to travelers and post those fees publicly. It was the first example of antitrust law but was less influential than the Sherman Act, passed in 1890.

The Sherman Act outlawed contracts and conspiracies restraining trade and/or monopolizing industries in an attempt to stop competing individuals or businesses fixing prices, dividing markets, or attempting to rig bids. The Sherman Act laid out specific penalties and fines for violating the terms.

In 1914, Congress passed the Federal Trade Commission Act, banning unfair competition methods and deceptive acts or practices. The Clayton Act was also passed in 1914, addressing specific practices that the Sherman Act does not ban. For example, the Clayton Act prohibits appointing the same person to make business decisions for competing corporations.

Special Considerations

The Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) are tasked with enforcing federal antitrust laws. In some cases, these two authorities may also work with other regulatory agencies to ensure that certain mergers fit the public interest.

The FTC mainly focuses on segments of the economy where consumer spending is high, including healthcare, drugs, food, energy, technology, and anything related to digital communications. Factors that could spark an FTC investigation include premerger notification filings, certain consumer or business correspondence, congressional inquiries, or articles on consumer or economic subjects.

If the FTC thinks that a law has been violated, the agency will try to stop the questionable practices or find a resolution to the anticompetitive portion of, say, a proposed merger between two competitors. If no resolution is found, the FTC may put out an administrative complaint and/or pursue injunctive relief in federal court.

The FTC might also refer evidence of criminal antitrust violations to the DOJ. The DOJ has the power to impose criminal sanctions and holds sole antitrust jurisdiction in certain sectors, such as telecommunications, banks, railroads, and airlines.

Major Example of Antitrust Law

In January 2023, the DOJ and eight states filed an antitrust lawsuit against Alphabet’s Google, alleging that the search giant has illegal monopolization of the digital advertising business. “Today’s complaint alleges that Google has used anticompetitive, exclusionary, and unlawful conduct to eliminate or severely diminish any threat to its dominance over digital advertising technologies,” the government agency said.

The filing, which seeks to make Google divest parts of its advertising business, alleges that the company has used acquisitions as a strategy for “neutralizing or eliminating” rivals and forces advertisers to use its products by making competitors’ products difficult to use. The complaint claims that the company’s monopolistic practices curtail innovation, raise advertising fees, and prevent small businesses and publishers from growing.

Google’s advertising business has come under fire from critics who argue that the search giant controls both the supply and demand sides of the digital advertising market. The company provides tools that help websites offer ad space and that assist advertisers in placing online ads. The suit alleges that Google’s dominance in the market allows it to pocket 30 cents of each dollar that advertisers spend using its suite of advertising tools.

The lawsuit marks the second federal antitrust complaint against Google in three years. Under the former Trump administration, the DOJ filed a lawsuit in October 2020, accusing the tech giant of using its monopoly to reduce competition through exclusionary agreements. That case is expected to go to trial this fall.

Google responded to the suit, saying the DOJ was attempting to intervene in the free market. “Today’s lawsuit from the Department of Justice attempts to pick winners and losers in the highly competitive advertising technology sector,” Google Global Ads Vice President Dan Taylor said in a statement.

The Bottom Line

Antitrust laws regulate the concentration of economic power to prevent companies from price colluding or creating monopolies. Proponents of antitrust laws argue that they keep consumer prices lower and foster innovation through increased competition. Critics say antitrust regulations intervene in the free market and reduce efficiency.

Antitrust laws are enforced by the FTC and DOJ, with the agencies focusing on areas of the economy that receive significant consumer spending, such as technology, healthcare, pharmaceuticals, and communications. Typically, antitrust investigations arise from premerger notification filings, congressional inquiries, or consumer and business correspondence.

What Is Asset Management?

Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value.

Asset management professionals perform this service for others. They may also be called portfolio managers or financial advisors. Many work independently while others work for an investment bank or other financial institution.

Understanding Asset Management

Asset management has a double-barreled goal: increasing value while mitigating risk. That is, the client’s tolerance for risk is the first question to be posed. A retiree living on the income from a portfolio, or a pension fund administrator overseeing retirement funds, is (or should be) risk-averse. A young person, or any adventurous person, might want to dabble in high-risk investments.

Most of us are somewhere in the middle, and asset managers try to identify just where that is for a client.

The asset manager’s role is to determine what investments to make, or avoid, to realize the client’s financial goals within the limits of the client’s risk tolerance. The investments may include stocks, bonds, real estate, commodities, alternative investments, and mutual funds, among the better-known choices.

The asset manager is expected to conduct rigorous research using both macro and microanalytical tools. This includes statistical analysis of prevailing market trends, reviews of corporate financial documents, and anything else that would aid in achieving the stated goal of client asset appreciation.

Types of Asset Managers

There are several different types of asset managers, distinguished by the type of asset and level of service that they provide. Each type of asset manager has a different level of responsibility to the client, so it is important to understand a manager’s obligations before deciding to invest.

Registered Investment Advisers

A registered investment adviser (RIA) is a firm that advises clients on securities trades or even manages their portfolios. RIAs are closely regulated and are required to register with the SEC if they manage more than $100 million in assets.

Investment Broker

A broker is an individual or firm that acts as an intermediary for their clients, buying stocks and securities and providing custody over customer assets. Brokers generally do not have a fiduciary duty to their clients, so it is always important to thoroughly research before buying.

Financial Advisor

A financial advisor is a professional who can recommend investments to their clients, or buy and sell securities on their behalf. Financial advisors may or may not have a fiduciary duty to their clients, so it is always important to ask first. Many financial advisors specialize in a specific area, such as tax law or estate planning.

Robo-Advisor

The most affordable type of investment manager isn’t a person at all. A robo-advisor is a computer algorithm that automatically monitors and rebalances an investor’s portfolio according, selling and buying investments according to programmed goals and risk tolerances. Because there is no person involved, robo-advisors cost much less than a personalized investment service.

How Much Does Asset Management Cost?

Asset managers have a variety of fee structures. The most common model charges a percentage of the assets under management, with the industry average at about 1% for up to $1 million, and lower for larger portfolios. Others may charge a fee for each trade they execute. Some may even receive a commission to upsell securities to their clients.

Because these incentives can work against the client’s interests, it is important to know if your management firm has a fiduciary duty to serve the client’s interests. Otherwise, they may recommend investments or trades that do not serve the client’s interests.

How Asset Management Companies Work

Asset management companies compete to serve the investment needs of high-net-worth individuals and institutions.

Accounts held by financial institutions often include check-writing privileges, credit cards, debit cards, margin loans, and brokerage services.

When individuals deposit money into their accounts, it is typically placed into a money market fund that offers a greater return than a regular savings account. Account-holders can choose between Federal Deposit Insurance Company-backed (FDIC) funds and non-FDIC funds.

The added benefit to account holders is all of their banking and investing needs can be met by the same institution.

These types of accounts have only been possible since the passage of the Gramm-Leach-Bliley Act in 1999, which replaced the Glass-Steagall Act. The Glass-Steagall Act of 1933, passed during the Great Depression, forced a separation between banking and investing services. Now, they have only to maintain a “Chinese wall” between divisions.

Example of an Asset Management Institution

Merrill Lynch offers a Cash Management Account (CMA) to fulfill the needs of clients who wish to pursue banking and investment options with one vehicle, under one roof.

The account gives investors access to a personal financial advisor. This advisor offers advice and a range of investment options that include initial public offerings (IPO) in which Merrill Lynch may participate, as well as foreign currency transactions.

Interest rates for cash deposits are tiered. Deposit accounts can be linked together so that all eligible funds aggregate to receive the appropriate rate. Securities held in the account fall under the protective umbrella of the Securities Investor Protection Corporation (SIPC). SIPC does not shield investor assets from inherent risk but rather protects those assets from the financial failure of the brokerage firm itself.

Along with typical check writing services, the account offers worldwide access to Bank of America automated teller machines (ATM) without transaction fees. Bill payment services, fund transfers, and wire transfers are available. The MyMerrill app allows users to access the account and perform a number of basic functions via a mobile device.

Accounts with more than $250,000 in eligible assets sidestep both the annual $125 fee and the $25 assessment applied to each sub-account held.

Frequently Asked Questions

The Bottom Line

Asset management firms provide the service of buying and selling assets on behalf of their clients. There are many types of asset managers, with some working for family offices and wealthy individuals and others working on behalf of major banks and institutional investors.