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Fidelity introduces 'fulcrum fee' in fund price overhaul

Fidelity introduces 'fulcrum fee' in fund price overhaul

Fidelity International is to introduce a performance related pricing model in a major overhaul of its pricing structure. 

The variable management fee operates as a sliding scale that is designed as a two-way sharing of risk and return known as a 'fulcrum fee'. See chart below:

This will involve both a reduction of the annual management fee and a change to a variable management fee that is symmetrically linked to fund performance, according to Fidelity.

Brian Conroy (pictured), president, Fidelity International commented: ‘We want to demonstrate real commitment to our active management capability. We will move away from a flat fee model and get paid according to how well we do for our clients.

‘These changes will more closely align the performance of our business with the performance of our clients’ portfolios and deliver what we believe clients and regulators are looking for.

‘Our fee structure will give back for underperformance of the benchmark, whereas others do not.’

Fidelity will launch a new share class across all of its equity funds that will incorporate the fee structure.

The first shares are expected to become available Q1 2018 at earliest.

The performance model will be calculated on a rolling three-year period and fees will not be charged for the initial 12-month period following their adoption.

At this stage Fidelity said it could not reveal what the maximum and minimum fees would be, as it expects there to be a series of fee ranges depending on the risk metrics of the funds.

The firm did say that funds which take higher risk will be required to deliver greater outperformance before the fees kick in.

The performance fee would still apply even if a fund loses money for investors, as long as it beats its benchmark.  

The company also said that roughly 5% of funds that use blended indexes would have to be reviewed and independently verified. This may result in a different index used in order for them to be eligible for the fulcrum fee.

Fidelity’s move towards a performance related pricing model comes one week after Allianz announced that it would trial a similar model.

Fidelity, which earlier this year announced that it would absorb research costs after Mifid II rules come into effect in January, also added that it would be adopting the CSA-RPA model for procuring third-party research.

It highlighted that the reduction of its base management fee will exceed and offset the allocated client charge for this research.

Conroy added: ‘[We have] looked at the implications of upcoming regulation, as well as taking into account feedback from the UK regulator in its recent market study on the lack of pricing innovation in our industry.

‘We believe that a far more fundamental change to how clients are charged needs to be instituted. We are passionate about giving our clients both choice and value and these changes will even better align our services directly to their needs and expectations.'

 

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