New evaluation of fund fee structures reveals tiered fees are best for retail investors

Monday 2 December 2019

  • CFA UK reviews fee models following recent innovations and the implementation of new FCA regulations

  • FCA’s new assessment rules expected to increase fund board focus on fee structures and drive further change
  • Tiered fees favoured for retail funds; managers and boards encouraged to consider their introduction

  • Fulcrum fees and reserve funds also praised


CFA UK today published a report evaluating fee structures used by asset managers for retail funds. 


The report follows various innovations in fee models in recent years, which have developed in response to competition and regulation. It comes shortly after the implementation of the Financial Conduct Authority’s rules on assessment of value, which came into effect on 30 September 2019 and will increase fund board focus on fee structures, likely driving further changes.


CFA UK advises that, to act in the best interests of investors, fund structures should embrace four core principles: (i) simplicity; (ii) transparency; (iii) alignment of interest between manager and investor and (iv) fairness to all investors. The report evaluates current and new fee models against these criteria.


The report strongly endorses tiered fees for retail funds, finding these to honour all four principles well. Based on the findings, CFA UK recommends that managers and fund boards actively consider how tiered fees can be introduced to retail funds.


It is found that performance fees can be an effective tool for aligning the interests of managers and investors. However, CFA UK warns that performance fees come with inherent risks and complexity, and extra care and attention is needed by fund boards to ensure that investors are treated fairly in all scenarios.


The report welcomes recent developments in performance fee structures 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.


The report sounds a precautionary note around the practice of introducing fee waivers, which, despite adding value, lack transparency for investors. It cautions that waivers might be perceived as a distortion of fee comparability due to their discretionary and unpredictable nature.


Says Keith Bonin, chair of the CFA UK Fee Structures Working Group: 

“There is no perfect fee structure. 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. Ultimately, it is up to each fund board to determine what fee structures are most appropriate for each fund’s different circumstances.”


Says Will Goodhart, chief executive of CFA UK: 

“This paper 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.”


Read Report


Notes to editors:


This report was compiled by CFA UK’s Fee Structures Working Group. Its members are CFA charterholders working across a number of different UK asset managers.


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About CFA UK

Part of the worldwide network of member societies of CFA Institute, CFA UK represents the interests of 12,000 investment professionals in the UK.