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Online ISA Investors to Pay Lower Fees for Underperforming Funds

written by Bella Palmer
Fidelity International

Fidelity International, one of the UK’s biggest online investment platforms and fund supermarkets with 1.2 million retail clients, most of whom invest via ISAs and SIPPs, has announced a new performance-related fee structure for its funds. In a nutshell, the changes mean that investors who have bought into funds that perform below their benchmark (for example the FTSE 250 for a UK-focused mid-cap equities fund) will pay lower fees than they do at present. However, retail clients who have invested in funds that outperform their benchmark will pay higher fees than those under the current structure.

The online investment platform operates the performance-related model in its home U.S. market, where it is also one of the biggest players in the retail investment industry. Referred to as ‘fulcrum fees’, Fidelity expects the change will actually lead to an increase in its UK revenues with investors paying higher fees on average. It is expected that many of Fidelity’s competitors in the UK will also begin transitioning their fee structures to a performance-related model over the next few years.

There will be an upper limit set on outperformance fees and a floor on what is paid by investors in underperforming funds. While there has long been criticism of the industry regarding fund managers receiving the same fees from investors regardless of the performance of their funds, the response to Fidelity’s announcement has been mixed. Investors in funds underperforming their benchmark will certainly welcome paying lower fees, though they would surely much rather the fund was simply doing well, with any fees presumably paid on the basis that a fund manager knows what they are doing. We can all underperform a benchmark index on our own, free of charge, no?

While it is likely overly optimistic to expect that investors in underperforming funds will pay no fees any time soon, the main questions being raised are around the seeming complexity of Fidelity’s new fee structure. It will apply to conventional equity funds for now, though investment trusts may be included in the future, which total around 400 funds. However, each fund will have its own fee structure to reflect its particular characteristics, meaning that investors will have to assess fees connected to every fund they consider investing in individually.

Another aspect to the new system which has been questioned is that fees will be based on a performance timeframe of 3 years, which Fidelity says is the average time an investor remains invested in one of its funds. Long term investors have questioned whether 3 years is long enough to offer an accurate gauge of performance. With fees also to be based against benchmarks, investors could also actually pay higher fees than now while still seeing an absolute loss if that loss is less than that of the benchmark. There is, however, a strong argument that in the toughest market conditions limiting downside is the best that can be achieved.

Generally speaking, Fidelity’s move should in theory be welcomed. Aligning the interests of fund managers with those of investors through performance-related fee structures has long been called for in the industry and makes sense. However, the devil will be in the detail and online investors and other big investment platforms will be waiting to see if Fidelity manages to strike the right balance with its new approach. 


This article is for information purposes only.

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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