View more on these topics

Performance fees will test active managers’ faith

Advisers, and clients, don’t mind paying more for active funds. Provided they perform, that is. Active evangelists will pitch it as a simple dichotomy: you pay us more because we make you more.

But what happens when they don’t? What is the mechanism that actually holds managers accountable? They get paid regardless. The fundamental philosophy of active management is under attack right now, and Fidelity’s answer last week was to hit back hard by introducing performance-linked fees across its equity range.

The move is radical. Radical enough that it requires absolute faith in the principles of active management. Fidelity is now completely wedded to the belief that its managers can beat downturns through careful stock selection. It is entirely at the mercy of the idea that even when markets are high, its managers can hit higher. Fidelity is praying at the Church of Active Management, and is begging advisers to join it.

Our cover story this week: Will performance fees restore faith in active management?

Depending on the detail, the move is either an altruistic appeal to play fair with clients, or a shrewd move to subtly improve margins. There will be a cap on the fees, so clients will not have to hand over their life savings when Fidelity seriously outperforms. But there will also be a floor, so Fidelity won’t be too much out of pocket when the benchmark marches ahead of it.

The thresholds for the cap and floor are absolutely crucial to whether or not this is a good deal for advisers. If the cap is set too high, Fidelity’s managers will have an incentive to keep adding risk to extract as much fees as they can. If it is set too low, then it makes the whole point of the exercise redundant, because the managers will not be rewarded for doing better with investors’ money.

Too wide a range will make cashflow modelling a mess for advisers trying to project what the cost of a client’s portfolio is going to be, when they don’t even know what they are going to be paying for it.

That’s why it is crucial that people really keep an eye on how Fidelity, and those that follow it, operate the new structure. Every single time an active manager is criticised for underperformance, without fail, it will say that the analysis has used the wrong benchmark. Or the wrong time period. Or has calculated costs or total returns incorrectly. As much as this appears to be about accountability, Fidelity could readily move the goalposts and I would wager that a significant minority would be none the wiser.

Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1

Recommended

Bentley-Graham-GBII-2013
2

Graham Bentley: The many problems with asset allocation models

Former FCA technical specialist turned consultant Rory Percival’s recent survey of risk profiling tools has stirred up yet more controversy regarding the suitability of asset allocation models within a risk assessment framework. I have had a number of approaches from model portfolio managers asking for help with asset allocation modelling, in particular the process of […]

Spotlight on charges 700x450.jpg
1

Vanguard calls for fees warnings on platforms

Vanguard has said warnings about high charges should be carried by platforms, not just by funds. In response to the FCA’s asset management market study in November Vanguard asked the FCA to include a “health warning” in funds’ documents to help investors understand the impact fees have on returns. It said this would be “a […]

Money-Cash-Coins-GBP-Pounds-UK-700x450.jpg
79

How much are advisers charging for pension transfers?

Advisers and networks are charging wildly different prices for advising on defined benefit to defined contribution pension transfers, Money Marketing research suggests. As well as a split between charging on a time cost or percentage basis, some firms appear to be charging as much as two times more than others. Firms that offer pension transfer […]

The best of both worlds

Business Development Manager Kim Nelson and Lead MPS Manager Steven Rooke discuss the direction of traffic towards investment solutions in the adviser market and the increased use of models as a complete client investment solution in an adviser’s business. They then discuss the active/passive debate, looking at both the history, investment process and implementation considerations […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Performance fees for active management are only valid if there is no charge if the fund declines in value. This has already been valiantly tried by Bedlam Asset Management. They then also offered a ‘normal’ charging structure, but in the end went bust. True they were only quite small, but the had a few very good funds.

    Personally I find this an unattractive proposition. It leads people to believe that values can always go up. I would rather pay a traditional fee and be somewhat more confident that the managers can position their investments to weather storms and mitigate losses as well as steadily increasing value and returns over time.

  2. Let’s wait until we see what the cap and collar are on these charges.

    Then we’ll know how seriously Fidelity believe in their ‘active gods’

Leave a comment