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Independent view – Peter Hargreaves

As in all legislation where somebody tries to cover all the bases, they inevitably find out that it is impossible to do so and when it is a desperate Government trying such a ruse, they eventually revert to common law.

The tax office tells us that it does not care whether any tax avoidance loophole does not contravene tax legislation, it is still going to find us guilty unless we tell it about the tax avoidance ruse first.

The FSA’s treating custo-mers fairly initiative is somewhat different. The regulator is quite rightly stressing that firms need to treat clients fairly in all dealings. Who could disagree?

However, defining fair is always going to be a diffi- cult if not impossible task. Fairness is a subjective issue. Having said that, there are some areas where it seems to me that charging structures do not seem to inherently treat clients fairly. In other words, a tiger is loose among the doves.

The most obvious area that one needs to look at care- fully is commission. We have all known that clients who proceed pay the commission that pays for the aborted cases.

Well, that would appear to mean that firms are treating the people who do not deal with them very fairly and the people that do deal with them (that is, their clients) unfairly. Oh woe is me, I am thinking.

So how does the green- eyed feline enter this tale? It all goes back to the story that the fund management industry tells about performance fees, which goes like this. Performance fees align the manager’s interests with those of the investor. If the fund does well, both do well. Perfect – where is the application form and pen?

So there it is. Performance fees clearly are the world’s answer to treating your cli- ent fairly. When the market is going up, the fund man- ager will be rewarded a little more for making money for the client so everybody is happy.

Some funds treat the client even more fairly by only giving more to the manager when they beat a benchmark – even better.

Where is the catch? What happens when the market goes down or if the manager fails to beat the benchmark?

They do not get the performance fee at all – splendid. The client can once smile again. He has been trea- ted fairly.

Let us summarise. If the market goes up or the fund manager beats the benchmark, the fund manager gets a bigger fee and the client is happy because his fund has done well.

When the fund goes down or the fund manager fails to beat the benchmark, they do not get a performance fee but are happy because they just get the basic fee.

Philosophically, they can say: ‘Well, I didn’t do it so I do not deserve it.”

Unfortunately, the poor old client has now realised he or she is in a duff fund or a duff market. So is the client happy and encompassed in the warm feeling that they have been treated fairly? Not bloom- ing likely.

The client has had their upside rewards diluted by performance fees. However, they have suffered the fall or underperformance totally and still paid the basic annual management charge.

In my opinion, performance fees only treat the client fairly if the fund manager suffers as much on the downside as they benefits on the upside.

Anything else treats the client unfairly – very unfairly – but does treat the manager superbly. Yes, if they have more on the upside, they should put in money on the downside.

I have never understood performance fees. Surely the best performance fee of all is increasing the value of the fund on which the fund manager takes their annual management.

They first increase the fund by performance and with exceptional performance by attracting new money. Surely that is enough.

It has made a few people exceedingly wealthy. The sad thing is that hedge funds have made an even bigger number of people obscenely wealthy when in some cases they have not achieved very much at all.

Peter Hargreaves is managing director of Hargreaves Lansdown


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For a job as big as managing the auto-enrolment changes, it’s important to know what has been completed and what still lies in front of you to give you the reassurance that everything is in hand. Getting the planning and project management right at the outset can help you see the path ahead and ensure everyone knows their roles and responsibilities. To help with this, Johnson Fleming has produced a checklist outlining every step that needs to be taken when preparing for auto-enrolment.


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