Fidelity International’s new ‘fulcrum fee’ structure has been met with a mixed reaction from advisers and fund sellers, some of whom fear it could add more complexity to an already confusing industry.
On Tuesday, the firm which manages £233bn in global assets under management announced radical new plans to cut the annual management charge (AMC) across its equity fund range and introduce a performance element.
Known as a ‘fulcrum fee’, the new structure will see existing AMCs initially brought down across the fund range and could be in place for clients as early as January 2018, according to the firm.
This will then rise and fall with the fee ceiling and floor set in a pre-determined range meaning it will increase during periods of outperformance and decrease during periods of underperformance.
“In response to the growing debate around the value of active fund management, the industry’s alignment with client interests and the transparency of charging structures, Fidelity International believes that now is the time to make a fundamental change in how it charges for its services,” a company spokesperson said.
Illustration of the Fulcrum Fee model
Source: Fidelity International
Fidelity will use a three-year rolling period to as its timeframe for outperformance and the higher fee will be taken if a fund beats its benchmark, even if the fund manager loses money.
Brian Conroy, president of Fidelity International said: “We will move away from a flat fee model and get paid according to how well we do for our clients.
“These changes will more closely align the performance of our business with the performance of our clients’ portfolios and deliver what we believe clients and regulators are looking for.”
Investors will not be forced into the new structure, however, with a new share class added to the existing ones, though those that remain may see an increase in their AMC figure.
The move has been met with mixed reviews, with Hargreaves Lansdown’s head of research Mark Dampier noting that it has added more confusion to the existing fee structures in place.
“Basically, most performance fees just aren’t transparent. You need to go into a dark room and hit yourself over the head a few times to understand it,” he said.
“You need to know what the benchmarks are, what the high water marks are and the lengths of time that’s being used.
“It’s hardly simple: it is a new share class. I just have to re-look at everything. I look at it and think that none of it is very easy and I don’t like things that are more complicated.
“You are making things more complicated for people – that’s how it feels to me – at a time when we are trying to move to easier things,” Dampier (pictured) added. 
“I just think it is unnecessarily messy because whether you call it a performance fee, a changing AMC or whatever, how can you say that is easy for anyone to follow? I don’t think it is.”
He said the firm should have consulted clients before making the announcement for feedback to see if there was appetite for the system.
“It is a strange way of doing it – to launch something but you don’t actually talk about it beforehand to your potentially major clients as well – it seems odd,” he noted.
However, Fidelity noted: “This fee structure is, in fact, a solid response to criticisms that we and the wider industry have received from clients and third parties alike.
“For a number of years and as recently as the FCA Asset Management Study, there have been concerns around a lack of transparency, lack of innovation in pricing and not always working in the best interests of clients.
“We have taken this on board and we believe this fee structure responds to those criticisms. We are already having detailed conversations with our clients and will continue to do so.”
Gina Miller, founding partner of SCM Direct, also said the new fee structure was confusing for investors.
“As MiFID II looms and aims to bring increased understanding and transparency for retail investors, it appears asset managers are in the back room seeing how they can create more confusion to lessen the dent in their profit margins that fee transparency will inevitably bring,” she said.
“In terms of the fulcrum fees, the Fidelity announcement raises more questions than it answers. If the benchmark loses 10 per cent but the fund loses 5 per cent, investors could still be charged the maximum fee?
“And if the benchmark is up 10 per cent but the fund is up 5 per cent you would be charged a minimum fee?
“Moreover, since you are always paying on the basis of the last three years performance which might be before you invested, would it be fair to pay this excess fee when your own money might not have outperformed whilst it was invested?”
Informed Choice managing director Martin Bamford added that another issue with the three-year performance band is that as the end of the period looms managers may be inclined to take on more risk in order to beat the benchmark.
However, Bamford said Fidelity should be given credit for attempting to innovate in the industry.
“In my opinion it is an attempt at innovation and I can see the motivation behind doing it,” he said, but added that he is not a fan of performance-based fees.
“I think they incentivise a manager sometimes to take on additional risk to hit their benchmarks and deliver over returns to get higher fees.
He added: “I would much rather see them lower fees across the board and keep things really simple because if I look at press releases and struggle to understand them what hope does a typical investor have?
“I think we should be pushing for simplicity and low costs in the world of investing we should not be trying to get there by creating more complex charging structures.”
Fidelity also announced that the firm would not be absorbing the additional research costs associated with the upcoming MiFID II regulations.
“We fully support the objective of the regulations but believe the debate has focused singularly on which model asset managers will use to pay for external research, rather than the total cost of asset management services and the value they deliver,” it noted.
“In addition, the global nature of our business, both in terms of our clients and their access to our internal global research platform, means we need to apply a consistent model across our business.”
Instead, the firm will reduce the AMC fees in accordance with the new ‘fulcrum fee’ structure by more than cost of third party research paid for using the Research Payment Account (RPA).
Hargreaves Lansdowne’s Dampier said: “They’ve also slipped under the radar the fact that they are charging clients for research costs as well. This, from a major group that does a lot of internal research as well, doesn’t look very good to me.”
SCM’s Miller (pictured) added that investors should not have to pay a higher AMC as well as research costs when a fund outperforms. 
“In terms of charging clients separately for research, I hope all Fidelity clients ask them what their annual management fee is for as surely research is a fundamental part of the investment service they are paying for?” she said.
“I really cannot understand why clients should have to potentially pay Fidelity three times for doing the same job: one, for managing the fund through the annual management fee; once through inflated dealing commissions to subsidise Fidelity’s own research costs in order for it to manage the fund; and, potentially, once again through performance fees arising from the successful management of the fund.”
However, Architas investment director Adrian Lowcock said he could see arguments for and against keeping these costs separate.
“I think the alternative of absorbing the fees is the obvious short-term solution and it works in certain environments,” he said.
“It probably works for multi-manager and fixed income funds for example where the research costs are different and they play a different role.
“With equity funds the success of that is probably going to be down to different houses and how they implement it. What we don’t know on that is if there are any unintended consequences.
“In theory they could raise the AMC costs – though I think that is unlikely because there is pressure from passives so there is pricing pressure anyway.”
The other issue, he said, is that companies taking these on board will be forced to pay close attention to these research costs and may to cut this as a cost-cutting measure.
“That could be a good thing because they could have been overpaying for research for far too long and look at it properly but the other side of it is you could be a business in distress and decide to cut costs in the wrong areas,” he noted.