Fund giant Fidelity International has announced it will move to to a “variable fee structure” as soon as the first quarter of 2018, where clients will be charged depending on how the fund performs.
The base annual management fee will be “significantly reduced”, said Fidelity president Brian Conroy, and when the fund outperforms a benchmark Fidelity will “share in the upside” with its clients.
When it under-performs, investors will be able to “claw back” some of the fees, and in this circumstance Fidelity estimates that clients will pay less than they currently are.
“We want to demonstrate real commitment to our active management capability. We will move away from a flat fee model and get paid according to how well we do for our clients,” said Conroy, adding that the firm was “putting our money where our mouth is”.
Investors will be able to choose whether to remain on the flat fee structure, or move to the variable structure by buying into a new share class which will be created across all Fidelity's equity funds.
"In principle the idea of a fulcrum fee sounds interesting, but it’s not possible to make any firm conclusions on whether it will deliver value for money for investors without specific details of the level of charges to be imposed," said Hargreaves Lansdown senior analyst Laith Khalaf.
"Performance fees do add complexity for investors, and make comparisons between funds more difficult. Performance fee structures can be well designed to work in the investor’s interests, though in the past we have seen some funds using weak benchmarks in their performance fee calculations."
The move comes following a push from the Financial Conduct Authority (FCA) earlier this year to increase competition and consumer fairness in the fund management industry, by making costs more visible.
It also coincides with the launch of the new European Mifid II regulations, due to kick in at the beginning of January, which aim to make fund management costs more transparent.
One consequence of Mifid II is that fund managers will have to pay for investment research separately, rather than having this included in the commission paid to brokers.
Fidelity said that with its new performance-based fees, the added cost of research should still mean the total fees paid by clients work out lower than is currently the case.
But those who remain on the flat fee structure will end up paying more, as the research sums are added.