Fidelity to launch performance-based fee on active fund

Fidelity is introducing a new performance-linked fee system for its active funds. If a fund performs badly you’ll pay less, but you’ll pay extra for market-beating performance. Here’s what you need to know.

Investment firm Fidelity International has announced it is going to change the way it charges you if you invest in its active funds.

The new variable management fee means will change depending on the fund’s performance.

This new system will mean the flat base management fee you pay will be reduced but tied to it will be a secondary variable fee which will shrink if your fund performs badly or increase if the fund does well.

The fund’s performance will be judged against its benchmark – if it beats the benchmark you’ll pay a higher fee, if it only matches the benchmark, or underperforms it you’ll pay less.

Fidelity's new fee will be introduced from January 2018.

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‘Fulcrum fee’

The fee system is being dubbed a ‘fulcrum fee’ giving customers and Fidelity a two-way share of the risk and return on the funds.

When an investment performs badly Fidelity will feel the pain by having to charge a lower fee, but it will recoup this when funds perform well.

“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,” says Fidelity International President Brian Conroy.

“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.

“Our fee structure will give back for underperformance of the benchmark, whereas others do not.”

As yet, Fidelity hasn’t given details of exactly how the new fee structure will work, only that base fees will be reduced and the variable fee will operate within a set maximum and minimum so investors aren’t surprised by what they have to pay.

“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 the charges to be imposed,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

“It’s important to keep in mind that fund fees are only part of the equation when it comes to assessing the value for money offered by any given active fund, the quality of the fund manager is also a key consideration. No-one wants an active fund that continually underperforms, no matter how cheap it is.”

What happens next?

When the new fees are initially introduced customers will be able to opt for them by investing in a new share class in the funds. Fidelity expects most people will opt to do this in order to avoid paying higher fees.

If you don’t move over to the new fee system you may will see your costs rise as Fidelity has also announced it will not be absorbing research costs, which under new rules have to be separated out and charged but other investment firms are choosing to absorb those extra costs.

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