The retail distribution review (RDR) has brought a notable shift away from annual fees towards payment based on transactions or time spent, for example on an hourly basis.
Research by Ledbury has found almost one in 10 high net worth clients now pay for advice on a time spent basis but pointed to a desire among many to link fees to performance and profit generated.
Despite this being a less mainstream – and potentially more volatile and less lucrative – approach, is it an option wealth managers are considering?
Boutique Tier One Capital introduced a performance fee after market research found most potential clients were strongly in favour. It says wealth managers should question the validity of charging ‘sizeable’ minimum fees when markets tumble.
Partner and Wealth Manager cover star Stephen Black (pictured with co-founder Ian McElroy) said: ‘We regularly received feedback from clients that it frustrated them there was no meaningful accountability for poor performance in the wealth management industry. Full fees would be levied regardless of whether performance was good, bad or indifferent.’
He said performance-related fees are linked to his confidence that the company can ‘more regularly make correct investment decisions than bad ones’. But he acknowledged clients often question when the performance fee kicks in, its size and what the downside scenario is.
While the boutique charges a flat fee of 0.5% per annum, it offers an additional performance fee subject to specific agreed targets being hit: 15% of any performance over 6% per annum; 20% above 8%; and 25% over 10%.
This is alongside a range of fee options, including performance-based fees, traditional fee structures and fixed fee retainers. ‘This choice is important as it ensure we can provide the type of fee approach clients prefer and see value in,’ Black added.
Manchester-based stockbroker Pilling & Co has also previously agreed to trial performance-related fees with a single client.
Wealth manager Alistair Hodgson said he dropped the charges after the client changed his mind ‘because I made a lot of money on good performance’.
He added: ‘It is ironic, but performance fees get a bad name when the performance is on the upside. Anything gets a bad name when people are shelling out for it. If there had been performance fees over the past few years, stockbrokers would have made a lot of money.’
Clients are not currently displaying unusual interest he added and usually abandon the idea when they see ‘what performance charges look like’.
‘They said they were not ready to pay the amount required,’ he said. ‘Imagine a client on a performance fee. Imagine if his manager has two or three poor years. Does this mean the manager will be out of business? What happens to the client’s money then? It would not give me much peace of mind.’
Jonathan Fry, head of jonathanfry Plc, said the real debate comes down to whether performance fees enable an alignment of interests for both the client and the firm.
‘I can understand why for clients, performance fees are a good idea but there is a real danger [for wealth managers] of losing what the main objective is all about: asset allocation,’ he said. ‘For some clients it may well mean that allocation is cautious and low-risk, not performance-led.’
Fry and Hodgson both say they understand why certain investment managers or fund managers are turning to performance fees.
The latter points to retail fund managers Bedlam Asset Management and JO Hambro Capital Managers as two very different firms that have made a play on performance related fees.
‘For me, JO Hambro Capital Managers are the best test run example as to whether that type of structure has legs, or not.’
Bedlam met with less success, recently announcing it was to wind down and return money to investors after it lost key clients, meaning the business was no longer sustainable.