April 1, 2011 5:54 pm

Performance fees may trigger exodus

Financial advisers have warned that they will pull their clients out of funds with high performance fees, amid signs that fund managers are set to ramp up their charges.

In a survey by Skandia, the life assurance group, only a third of financial advisers said they did not expect performance fees on mutual funds to rise this year. Nearly half said that they would pull their clients out if they did.

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Performance fees on managed funds are often in addition to a standard annual fee of 1.5 per cent or more, and advisers have warned that such fees are a “one-way bet” for fund managers.

“Performance fees currently operate in favour of the manager and that’s a bad outcome,” said David Norman at TCF Investment. “I think a lot of advisers aren’t convinced by man-
ager-only fees on the upside.”

Ed Moisson at Lipper said that UK funds with performance fees were still in the minority, so investors could vote with their feet if they wanted to.

The findings come as fund managers begin to launch funds with lower annual management charges but additional performance fees ahead of a shake-up in the way products are sold from 2013. The upcoming ban on commission as part of the Retail Distribution Review
(RDR) is already producing some “RDR-ready” funds. One, from JP Morgan, has a performance fee but a much lower than average annual charge.

Advisers said the application of performance fees would increase the need for investors to understand all the hidden charges on their funds. “If we’re going to see a growth in funds doing performance fees, we’ve got to see a better way of disclosing charges in order to determine whether there’s actually been any performance,” said Robert Reid at Syndaxi.

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