Fidelity’s fund charging overhaul: a game changer or damp squib?

Fidelity has introduced a performance-based fee model for some of its funds. Tom

Fidelity are set to introduce variable fund manager fees that move between -0.2 per cent and +0.2 per cent, depending on fund performance.

Fidelity announced back in October that they would move towards a performance based fund manager structure, called the Variable Management Fee.

This new fee will see the annual management charge start 0.65 per cent, 0.10 per cent less than its old fee. The new fee, however, will be able to fluctuate by 20 basis points either way, depending on performance versus its benchmark.

For a UK equity fund, as an example, performance may be linked to the FTSE All-Share index. If the fund beats that index, the new fee will be a maximum of 0.85 per cent. If it underperforms, investors will pay as little as 0.45 per cent. 

The new structure will only apply to a small number of funds at first, 12 in total, but is likely to be rolled out further at a later stage. Existing investors in the fund will be able to keep their current fee structure for the time being, unless they opt to switch.

According to Patrick Connolly, certified financial planner at Chase de Vere, the new fund structure is one that should be welcomed. He says: ‘Fidelity’s performance fees seem to strike a fairer balance between rewarding managers for strong performance but also protecting the interests of investors if their investments perform badly.’

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However, notes Adrian Lowcock, investment director at Architas, while the attempted innovation of variable fees is ‘good to see,’ there are some problems with the new charging structure.

First of all, it is an added level of complexity. ‘Trying to explain the performance fee to investors will take a lot of time and effort and there is a risk of greater misunderstanding,’ he says.

Laith Khalaf, senior analyst of Hargreaves Lansdown is even more critical: ‘We think investors would prefer to know what they are paying as a simple annual charge, rather than having to resort to a spreadsheet to model the possibilities

He worries that ‘if this variable fee structure were to proliferate across the fund management industry, with different caps, floors and variable charges applied by different fund groups, it would make life extremely difficult for UK investors.’

Added to that is another complexity: costs associated with new regulations coming into force in January, which will require sell-side brokers to charge fund management companies for their research. As Connolly points out, unlike the vast majority of other fund managers, Fidelity have chosen to pass on these costs to their underlying investors rather than put their hand in their own pockets. The research costs will be included in the ongoing charge figure, which is a truer reflection of the amount fund investors pay each year.

Therefore, at this stage it is unclear how Fidelity’s new charging structure will stack up against other fund management firms that have chosen not to charge investors for research.

‘It needs to be recognised that Fidelity will, unlike many other investment companies, be passing on research costs to investors,’ adds Connolly.

The shake-up in pricing structure, however, Connolly says, will ‘hopefully lead to more price competition and ultimately lower charges, something which investors in actively managed funds haven’t benefited from in the past.’

‘Fidelity’s move,’ he says, ‘has thrown the gauntlet down to other investment managers to review their charging structures.’

Justin Modray, director at Candid Financial Advice, agrees that Fidelity’s move is a ‘positive step’, which could prove a game changer. ‘Fidelity is genuinely sharing some risk with investors by lowering its fee if it underperforms,’ he says.

Modray adds: ‘This is a significant step forwards for fund charging and while it still doesn’t address fund managers generally failing to pass on economies of scale to investors, it’s a very positive move. Let’s now hope that other popular fund managers including M&G, Jupiter, Fundsmith, Invesco Perpetual and Woodford take note and follow suit, so that we start to see widescale reform across the industry.’ 

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