On Tuesday Fidelity International made a huge announcement that it would implement a new performance related pricing model across its equity fund ranges.
The model called a ‘fulcrum fee’ will see management fees rise and fall with performance against a benchmark to pre-agreed maximum and minimum caps.
The system will be offered though a new share class that will have a lower base rate management fee to incentivise clients to adopt the model.
‘In principle the idea of a fulcrum fee sounds interesting, but it’s not possible to make any firm conclusions on whether it will deliver value for money for investors without specific details of the level of charges to be imposed,’ said Laith Khalaf (pictured) a senior analyst at Hargreaves Lansdown.
‘It’s important to keep in mind that fund fees are only one part of the equation when it comes to assessing the value for money offered by any given active fund, the quality of the fund manager is also a key consideration. No-one wants an active fund that continually underperforms, no matter how cheap it is.’
The move to overhaul its pricing model comes after Financial Conduct Authority’s recent asset management study, which found that there had not been enough innovation in pricing models.
‘Fidelity’s move appears to address a central criticism in the recent FCA asset management study that there is lack of fee-based competition amongst asset managers, with a move to a fee structure that should better align with investors interests,’ said Jason Hollands, managing director business development and communications at Tilney Investment Management Services.
‘Unlike traditional performance fees structures, where the rewards are loaded in the managers interests when things are going well, this proposed model works both ways as it will see fees reduce when funds underperform so the pain is felt by the management group.’
‘We believe that a far more fundamental change to how clients are charged needs to be instituted,’ he added.
Whilst it should be applauded for innovating, the fulcrum fee could end up confusing Fidelity’s clients and make comparisons between funds harder, comments Hargreaves Lansdown’s Khalaf.
‘Performance fees do add complexity for investors, and make comparisons between funds more difficult. Performance fee structures can be well designed to work in the investor’s interests, though in the past we have seen some funds using weak benchmarks in their performance fee calculations, and some levying relatively high annual management fees too.
‘So like fixed annual fees, performance fees and fulcrum fees can be good or bad value for money, depending on the level they are pitched at, and the specific fund in question.’
James Calder, research director at City Asset Management agrees, commenting: ‘We've asked for some worked examples so we can get a better idea of how they will work, but have been told these are weeks away.'
However, he added that he expects that many of the larger asset managers are now likely to take a more serious look at linking fees to performance.
Fidelity also announced that it would not absorb external research cost after Mifid II rules take effect in January, arguing that the fall in management fees would account for cost its will pass on to clients.
‘Fidelity’s decision to pass investment research costs on to clients may be seen as bold, particularly following a summer where the majority of Europe’s largest asset managers have declared the opposite,’ said Chris Turnbull, co-founder of ERIC (Electronic Research Interchange).
‘An asset manager’s decision on how to pay for research is unique to that firm, and has to work for the organisation and its client base. If the decision improves transparency and the manager’s ability to achieve a better end result the MiFID II unbundling rules have done their job.’