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Fidelity introduces risk-sharing fund fee in global overhaul [updated]

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Fidelity International has introduced a variable management fee across its entire equity offering, which will see charges fall if funds underperform.

The group is to introduce a new range of share classes for equity funds with a reduced base annual management charge and a “variable management fee”, also referred to as a “fulcrum fee”, that is “symmetrically linked” to fund performance.

It will mean that the annual management fee will rise if a fund outperforms its benchmark index, but will fall if the fund underperforms.

Any rise or fall would come irrespective of whether the fund posts a gain or loss in the period charged, global CIO for equities Dominic Rossi told reporters this morning. Therefore, if a fund lost money but beat its benchmark it would raise its fee, and if the fund made money but underperformed its index it would lower its fee.

Rossi added that a small number of funds may alter their benchmarks in order to ensure they were verifiable and appropriate for the new fee structure, but emphasised that there would be “minimal” changes.

Fidelity runs roughly $170bn (€144.6bn) in equity assets at the end of June, the company said, all of which will become eligible for the new charge structure under the company’s plans. The group runs more than €264bn worldwide across all asset classes according to IPE’s Top 400 Asset Managers survey.

In a statement, Fidelity said: “Where we deliver outperformance net of fees we will share in the upside and in the case that clients experience only benchmark level performance or below, they will see lower fee levels under this new model. The fee that clients will pay will sit within a range and will be subject to a pre-determined cap (maximum) and floor (minimum).”

Fidelity's proposed fulcrum fee equity charging structure

Fidelity’s proposed fulcrum fee equity charging structure. Source: Fidelity International

Subject to discussions with local regulators, the new share class is expected to launch in the first quarter of 2018, Fidelity International president Brian Conroy said. The exact level of fees, as well as the floor and ceiling, would be agreed with fund boards, distributors and regulators in the next few months, he said.

Conroy claimed the new fee structure would “more closely align the performance of our business with the performance of our clients’ portfolios”. 

In addition, Fidelity has bucked the industry trend on investment research costs by introducing a ‘client pays’ method. However, the group insisted this would be more than compensated by the other fee changes.

The group will use research payment accounts and commission sharing agreements to explicitly disclose the cost of investment research to clients, in compliance with MiFID II rules coming into force in January.

Fidelity said it also intended to extend its range of passive funds to provide more options to clients “who simply want to drive down costs and do not want to pay for the active approach”.

Note: This article has been updated to correct the equity and total assets under management figures.

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