CFA UK: Tiered fund fees best for retail investors
Fund managers should consider implementing tiered fees
Asset managers should "actively consider how tiered fees can be introduced to retail funds" after a study by CFA UK found they were the structure that works most strongly in investors' best interests.
In a report published on Monday (2 December), CFA UK's Fee Structures Working Group assessed the numerous fee models used by retail funds that have been developed in response to competition and regulation in recent years.
It evaluated all fee structures in the retail market against its four principles to which funds should adhere in order to act in the best interests of investors: simplicity; transparency; alignment of interest between manager and investor; and fairness to all investors.
The CFA UK report concluded it strongly endorsed tiered fees for retail funds, "finding these to honour all four principles well". It said fund managers should consider adopting them for their retail offerings.
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While the report said performance fees "can be an effective tool for aligning the interests of managers and investors", it noted they "come with inherent risks and complexity". "Extra care and attention is needed by fund boards to ensure that investors are treated fairly in all scenarios," CFA UK added.
Keith Bonin, chair of the CFA UK Fee Structures Working Group, said there was "no perfect fee structure" for funds.
"We acknowledge that there will be trade-offs between the four principles and which structures are most beneficial for investors will depend on the risk and performance characteristics of the fund," Bonin continued.
"Ultimately, it is up to each fund board to determine what fee structures are most appropriate for each fund's different circumstances."
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Overall, CFA UK said it welcomed recent developments and innovations in fee structure, "which are improving this alignment and providing better protections for investors".
"These include mechanisms such as fulcrum fees and reserve funds, which allow fund managers to share in the downside when there is underperformance."
However, it cautioned that while introducing fee waivers added value, "lack transparency for investors". "Waivers might be perceived as a distortion of fee comparability due to their discretionary and unpredictable nature."
Will Goodhart, chief executive of CFA UK, said the report "provides an important reminder of the key principles that should inform all fee structures".
"We hope that it will be useful and informative for our profession generally and specifically for the 480 or so independent directors recently appointed to UK fund boards and now charged with leading the preparation of their fund's assessment statements for year-end."
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