3 Dec 2019
The high fees paid to active asset managers have captured the attention of regulators in recent years. Most recently, in February, the Financial Conduct Authority’s chief executive, Andrew Bailey, told a parliamentary committee that the fund management industry had failed to pay sufficient attention to costs, instead focusing only on investment returns. He said the FCA expects them to do both.
This latest warning stems from the regulator’s Asset Management Market Study in 2017, which found that many asset managers were making high profits from investors without always delivering value. The study also found that the prevailing model in the industry today was a ‘flat fee’, where investors are charged a fixed percentage of their assets under management. Performance-based fees offer an alternative and potentially fairer approach, but have not been widely adopted by fund managers, or advisers.
Not all performance-based fees are fair
It’s understandable that some are wary of performance-based fees. Well-structured performance fees should reward managers for doing a good job for the investor, and penalise them when they don’t. But many of those used in the industry at the moment don’t actually lead to better outcomes. Some, for example those with high base fees or inappropriate benchmarks, masquerade as a good deal but are downright unfair.
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