Fund boards should work harder to introduce tiered fee arrangements, according to CFA UK, which found the model typically worked out best for investors.
The CFA examined different fee models and found that a tiered model, whereby the fee paid by investors falls as the fund gets larger, is the best for retail investors.
This was based on four criteria: 1) simplicity 2) transparency 3) alignment of interests between the fund manager and investor, and 4) fairness to all investors, which a tiered structure tends to honour best.
As a fund gets larger it may be difficult for the fund manager to replicate previous performance as they must deploy more money either into a larger number of investments or by taking larger stakes in the same number of investments and a tiered fee helps offset this risk.
Investment trusts have increasingly introduced tiered fees in recent years, but the practice is far less common among open-ended funds.
Data from the Association of Investment Companies (AIC) shows that 50 investment trusts have introduced tiered fund fee structures since 2013, while 39 trusts removed the performance fee.
The AIC told FTAdviser 139 of 357 (39 per cent) investment companies in the AIC universe (ex VCTs) now have tiered fees.
The report also examined the merits of performance fees, which Mr Bonin said could be effective but added complexity for advisers.
The body had the same objection to fulcrum fees, a structure introduced by Fidelity on some of its products. These fees vary depending on the performance of the fund and so can fall in a year of poor performance.
For example Orbis Investments has a fee structure that involves zero ongoing charge, but with a performance fee. In years when the company’s funds underperform the respective benchmarks investors receive a rebate on the performance fees paid in the previous year.
Keith Bonin, chairman of the CFA UK fee structures working group, said: “There is no perfect fee structure. We acknowledge that there will be trade-offs between the four principles and which structures are most beneficial for investors will depend on the risk and performance characteristics of the fund.
"Ultimately, it is up to each fund board to determine what fee structures are most appropriate for each fund’s different circumstances.”
The report came after the implementation of the Financial Conduct Authority’s rules on assessment of value, which came into effect on September 30 and will increase fund board focus on fee structures.
Investment trusts have long had independent boards of directors, while the FCA, as part of its Asset Management Market Study, now requires open-ended funds to also appoint independent non-executive directors.
Francis Klonowski, an adviser at Klonowski and Co in Leeds, said: “Since I became an independent adviser in the early 90s I have tended to use more investment trusts than unit trusts, and the lower fees are a big part of that.
"The other advantage when I started was the most investment trusts could not pay commission to the adviser, and that meant there was really just one fee, I use very few unit trusts for clients at all.”
david.thorpe@ft.com
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