In poll of 557 Trustnet readers, a landslide 84 per cent said they wished to see fund fees directly linked to manager performance.
Source: Trustnet.com
Kerry Nelson, managing director at independent financial adviser Nexus, agrees that, in an ideal world, performance-linked fees would be great for investors.
"It will get rid of mediocre and badly performing funds by incentivising managers to earn their keep," she explained. "But we have to accept that nothing comes for free."
The question over fees follows an unprecedented move by NFU Mutual, which cut the annual management charge (AMC) in its Deposit Fund in a bid to preserve capital. NFU Mutual said it took the action because investors had an expectation that the fund would not reduce in value.
However, Ben Yearsley, investment manager at Hargreaves Lansdown, says that investors hoping to see management fees consistently waived following periods of underperformance are likely to be disappointed.
"I think what NFU Mutual has done is an interesting move but I think cutting the AMC when a fund underperforms is probably unrealistic," he said.
"Companies need a base level of fees to pay for the running of the fund and back-office costs that you don’t really think of."
"The danger if you cut fees is that managers start scrimping on the stuff that’s really important. It’s unrealistic to not have some level of management charge."
Yearsley says that charges have been creeping up and up over the last four or five years and although some performance fees have been introduced, they have not been in the model that he would like.
"They [performance fees] seem to be a one-way bet for fund managers," he explained. "We’re likely to see more and more but they really need to be fair. There’s a little imbalance in favour of the manager."
Chris Spear, managing director at Spear Financial, believes management and performance fees are not only there to allow the management companies to take their slice, but that they also reward the type of approach needed for long-term investment.
"Ultimately, we ask managers to make decisions with long-term performance in mind so naturally they will go off the boil from time to time," he explained.
"My concern is that performance-linked fees could lead to managers chasing short-term performance and forget about the long-term strategy."
"There’s also a need to motivate," he added. "We know managers have egos and these need to be maintained."