Abigail Johnson, chairman and chief executive of Fidelity Investments, has called for ‘a fundamental rethink’ of how asset managers charge their clients.
She made the comments in a column written in The Financial Times, which followed a recent announcement by Fidelity International that the offshore asset manager was to overhaul its equity fund fees.
The firm is adopting a new model across this fund range that will involve both a reduction of the annual management fee and a variable management fee.
The variable management fee is performance-related and operates as a sliding scale, acting as a two-way sharing of risk and return, also known as a fulcrum fee.
In short, Fidelity will earn a slightly higher fee if its funds outperform their benchmark but will take less if they underperform.
According to a Fidelity spokesman, US-based Fidelity equity funds have been employing a similar structure since the early 1970s.
‘We believe performance adjustments benefit shareholders because they even more closely align our economic interests with theirs,’ he said.
The changes to the International fund fees comes as managers in Europe adapt to the demands of Mifid II, a piece of regulation that requires them to be more transparent about the cost of research they buy from analysts, which has historically been passed on to clients.
Many firms have reacted by announcing plans to absorb this cost themselves while a minority have said they will continue to ask clients to pay, but make it more explicit.
Johnson said firms’ response to Mifid did not go far enough and that they needed to do more to embrace the spirit of the regulation, which focused on lowering fees, increasing transparency and aligning managers’ interests more closely with investors’.
‘I fully support the aims of regulation such as the incoming Mifid II trading rules but our industry has missed the point by focusing almost exclusively on how third-party research is paid for. Asset managers need to step back and respond holistically to the spirit of the regulators’ requests,’ she wrote.
She stated that asset managers should evaluate, ‘thoughtful budgeting of both research and dealing costs,’ and not solely research costs, because in doing so they risked missing the big picture on regulators driving down transaction costs.
Johnson said Fidelity’s fulcrum fee was a means of achieving these ends.
‘We need a fundamental rethink of the way asset managers charge their clients,’ she wrote. ‘Fulcrum fees have been used in the US since the 1970s, charges that rise when the fund outperforms, but fall by the same amount when the fund underperforms. Simple.
‘Yet they are still remarkably uncommon in the US and virtually unheard of in Europe or many parts of Asia.
‘Too many asset managers approach each market or regulatory challenge they face one at a time. It is vital that we stand back and see the bigger picture.’
Read the FT article in full here.