The new variable fee structure unveiled by Fidelity this morning (29 November) has been branded “complicated” and will be “difficult to explain to clients”.
The company announced on 3 October it intended to move away from its traditional fee model and introduce a new variable structure, where performance fees will be levied if the fund outperforms.
Those performance fees will be “refunded” if the fund subsequently underperforms relative to the market.
Today Fidelity has revealed the annual management charge for its actively managed funds will fall by 0.10 per cent.
The variable part of the fee will slide up or down based on how the fund outperforms or underperforms relative to its pre-defined market index, after all fees and charge.
This scale will reach a maximum of +0.2 per cent above the annual management charge (the ceiling) and go as low as -0.2 per cent below the annual management charge (the floor).
The maximum and minimum fee levels are reached once the fund outperforms or underperforms the relevant market index by +2 per cent or -2 per cent on an annualised basis calculated over a three-year rolling period.
This means the highest fee level an investor could pay is 0.85 per cent, which would be the charge if the fund outperforms the benchmark by 2 per cent a year over a rolling three year period.
The lowest annual charge would be 0.45 per cent if the fund underperforms the benchmark by 2 per cent a year on a rolling three year basis.
The performance fee will only be levied once the fund has beaten the relevant market index after all fees and charges.
But Adrian Lowcock, investment director at rival fund house Architas, said he is skeptical of the merits of a company receiving a performance fee for outperforming the index.
"The annual management charge is what an investor pays in order to get outperformance of the index. That is why active fund charges are higher than passive fund charges," he said.
He added that while the refunding of performance fees following a spell of poor performance is “important”, he feels this could be difficult to explain to clients.
Unlike many of its peers, Fidelity announced in October that it will not be absorbing the cost of fund research, the cost of which firms must disclose under Mifid 2 regulations. Fidelity will pass this cost onto investors. The company said the research budget equates to 2 basis points a year per fund.
The new fee structure will be applied to selected Fidelity open ended funds from the start of 2018, and be rolled out across the equity range as the year progresses.
Paras Anand, chief investment officer for equities for Europe at Fidelity, said the company is negotiating with the boards of the investment trusts it manages and with institutional clients to revise the fee structures on those products.
Mr Anand said the motivation for the fee changes was not to respond to pricing pressure from passive funds, “but instead it is about achieving a better alignment of interests between Fidelity and its clients”.
He said if active fund managers engage in a “race to the bottom” on actively managed fund fees, “the danger is the quality of the service offered by the active fund providers declines”.
Doug Millward, investment manager at Lowes Financial Services, said the move was "interesting" and a clear response to the Financial Conduct Authority's concerns over fees charged across the asset management industry.
"The key point in all this is how the fund managers themselves are remunerated alongside the new fee structure," he said.
"The ability to earn a higher fee through outperformance aligns the fund manager’s interests with those of the investors, but a fear of underperformance, and consequently a lower fee, could lead to managers being averse to taking a risk and becoming closet trackers.”
Rory Maguire, managing director at fund research firm Fundhouse, said he thinks Fidelity's performance should be measured over a longer time period.
He said: “We would prefer they employed longer time horizons for measuring it.
"Three years remains short and most managers prefer to be measured over longer time frames. Shorter time frames confuse skill and luck more and it may encourage the fund managers to be more shorter term.
"Also, in an ideal world, we would also like to see lower base fees on performance fees, so clients end up paying index type fees when performance is not delivering alpha, otherwise fund managers remain margin positive when clients are receiving poor outcomes.
"But we can see how this is hard to achieve with Fidelity given the need to cap the fee at around 1 per cent (they would likely want more upside if they take a large hit on downside)."
David.Thorpe@ft.com
