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Fund investors seek more details on Fidelity’s fees changes

Fidelity Investments’ new fee structure appears to better align with investor interests, but more details are needed before it can properly be compared with the status quo offered by competitors, fund investors say.

Fidelity International says as part of a global shake-up of fees it will introduce the ‘fulcrum fee’, which means fees will be higher when it delivers outperformance net of fees, but will be lower if performance meets or is below the benchmark.

There will be a cap and floor for the fees.

Fidelity will also reduce its annual management charge (AMC) as it announces clients will pay for research under Mifid II regulation coming in on 3 January.

FundCalibre managing director Darius McDermott says it’s “not common” to make such big announcement without details for investors, such as what the cap and collar will be.

“What Fidelity has done is innovative and will give professional investors more choice, but I’m afraid the devil is in the detail before we can be really pro or anti this offering.”

McDermott adds that additional share classes with different charging could be confusing for retail investors.

Morningstar director for manager research ratings Jonathan Miller says the research agency generally likes the fulcrum fee structure as it better aligns fund manager and investor interests, but agrees that further details are needed before they will make a firmer judgment.

Tilney Group managing director Jason Hollands says Fidelity’s move “seeks to address a central criticism in the recent FCA Asset Management study” that there is lack of fee-based competition amongst asset managers.

While rewards are loaded in the fund managers’ favour with traditional performance fees, fulcrum fees mean the pain is felt by the management group when funds underperform, Hollands says.

Disapproval on research costs 

McDermott says he does not approve on Fidelity’s announcement that it will charge clients for research costs when Mifid II comes into force on 3 January.

“They’ve tried to frame that as part of that bigger debate on this innovative change of share classes,” McDermott says.

“Frankly, my position has been pretty consistent on [research costs]. With the regulator’s market study and Mifid this has given fund managers a nice opportunity to help lower costs for clients and to take those costs on their own balance sheet.”

I think companies can be innovative whether they’re private or limited. Shareholders want good returns, but as we know the regulator is looking at whether these supercharged returns are excessive or fair. Fund managers are running money to make money for shareholders and themselves.

‘Not a typical performance fee’

Fidelity International president Brian Conroy says he hopes the company’s adoption of fulcrum fees will become a milestone for the active asset management industry and will be taken up by “the vast majority” of funds.

“This is not the typical performance fee, which is so disliked in our industry because it is a one-way bet that only has upside for the asset manager,” says Conroy.

“Instead our fulcrum fee is a systematic two-way sharing of risk and return, where when we deliver outperformance we will share a little of the outperformance and we deliver benchmark performance or less our investors will pay less than they currently do.”

Conroy says the decision was taken after considering the global landscape for fund management regulation not just “single parochial issues with respect to one jurisdiction’s view”.

“What we heard was alignment and transparency over and over again across jurisdictions and that’s what we tried to respond to,” says Conroy.

Fidelity says the company may take a short-term hit as funds that currently use “asymmetric” performance fees shift to a “symmetric” model, whereby both outperformance and underperformance are factored in.

In the long-run the impact on the company’s balance sheet would depend on whether fund managers delivered outperformance or not.

Fidelity executives could not answer questions regarding the impact on the business if current levels of fund manager performance were maintained because the details on the charging model have not been fleshed out.

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