Skip to the content

IFAs call for overhaul of fund management fees

01 November 2011

Advisers say many alternatives to the current system of charging would be better suited to investors and wouldn’t necessarily cost asset managers any more.

By Mark Smith,

Reporter, FE Trustnet

The fund management industry needs to rethink the way fees are structured so they are more aligned with the interests of the investor, say independent financial advisers.

IFAs have reopened the debate about the emotive issue of annual management charges following the news that total expense ratios (TERs) have increased by more than 15 per cent over the last 12 months.

Industry professionals have long called for an overhaul of the way investors are charged, saying that fees are more aligned with asset managers' profit margins than they are with the interests of the investor.

Some analysts have argued that fees based entirely on performance could act as an incentive for managers to deliver the best returns for their investors. However, at the moment performance fees are used in conjunction with traditional annual management charges and are used by asset management houses to attract the best talent to manage their vehicles.

Critics have said that rewarding managers for short-term outperformance could lead to unnecessary risk-taking. According to data from FE Analytics, 85 funds carry a performance fee, the majority in the Absolute Return sector.

Tim Cockerill, head of collectives research at Rowan Dartington, says that a structure needs to be put in place that can reward managers for good work without compromising the long-term interests of their investors.

"I am not a fan of performance fees," he said. "The only sensible structure as far as I can see is one that aligns the interests of both manager and client and it should be based on performance over at least three years."

"If this were in place then short trading and risk-taking to grab short-term bonuses wouldn’t occur and if the manager's bonus was in the form of units in their fund then the alignment is even closer."

He added: "Even the very best managers underperform for periods and sometimes long periods, and for this reason long-term incentives are better. Anthony Bolton and Neil Woodford have underperformed at times but investors are rewarded for being patient and the funds are managed on a long-term basis, interests are aligned."

"A low base fee and managers being rewarded on long-term performance is where I would like to see the industry heading."

Chris Spear, managing director of Spear Financial, believes that the open-ended fund industry can learn a great deal from the models being used in other types of investment.

"The problem with the performance fee is that in the type of stock market conditions that we have seen recently, a manager can still lose a client money, yet be above the average for the sector, in which he would get paid the higher fee," he said.

"One niche provider in the Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) world, Octopus Investments, doesn't take its annual management charge until the investor has received what was targeted."

"In the case of VCTs and EISs, it could take three-to-five years before the manager gets paid, so they have to keep their eyes on the ball throughout. I can see that this would be difficult to administer with everyday investments, but such an approach clearly demonstrates the desire to put the client first."

"Perhaps I am naive in thinking that if you make the client the priority, then they stay with you and refer others to you."

Adrian Lowcock, senior investment adviser at Bestinvest, thinks that the current system could be made to work with a few important tweaks.

"The problem with the current system is fund managers are still rewarded for poor performance, and therefore I would like to see a graduated scale, so an investor would pay a lower AMC if the fund manager underperformed," he said.

A recent FE Trustnet article highlighted some of the methods investors can use to keep the cost of buying funds down, including focusing on low-cost investments or investing in passive funds.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.