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Is Fidelity’s performance-based fee a good idea?

Performance level

On Tuesday, Fidelity sent shockwaves through the industry when it said it will be switching to a “value for money” charging structure, sharing in the upside when its funds do well and reimbursing clients when its vehicles fall short.

Needless to say, the fund manager’s bold proposition proved divisive.

Tim Peeters, head of securities portfolios at multi-family office Portolani in Antwerp, welcomed the move. “A lot of clients are demanding changes to charging structures, and I agree with them. Isn’t it just fair to only pay a fee if that’s justified by performance?”, he asks. “But to be honest, I’m not sure how many managers will dare to follow in Fidelity’s footsteps.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, for one, argued that it was difficult to assess whether the “fulcrum” fee would be a game changer for the active management sector.

“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.

“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.”

Others, like Rory Maguire of Fundhouse, did not think Fidelity’s decision to pass on research costs to its clients, while introducing a more flexible fee, was a fair trade-off.

“We were disappointed with Fidelity’s announcement today, with respect to passing on the cost of sell side research to their clients,” said Maguire.

“This is a cost to them, in our view, in the same way their own internal research teams are their cost too.  In the choice between doing what is convenient or doing the right thing, they favoured convenience and this is very disappointing.”

However Jason Hollands, Tilney Group’s managing director, called Fidelity’s fancy footwork around fees “a step forward,” which addresses one of the main criticisms raised by the Financial Conduct Authority in its asset management study.

“Ideally, this should better align the firm’s remuneration with the experience of investors,” he said.

“In my mind, that’s a step forward, of course, the devil will be in the detail, which we don’t have today. It remains to be seen actually where those fees settle at. We need more information but clearly, this is an innovation in fees, which is what the FCA were looking at and seems more appealing than traditional fee structures.”

Kristen McGachey

Kristen joined Last Word Media and the world of financial journalism in April 2016, leaving behind a career in a legal publishing firm as a senior researcher turned assistant editor. This native Angelino...

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