A fair fee for a job well done

I like performance but I do not like performance fees. There are fund managers (including KiwiSaver fund managers), who charge a fee for management, but then on top of that, charge another fee if they get returns above a certain level.

I object to these “performance fees”. Some fund managers will say they should have a performance fee to motivate them: in the jargon, the fund managers’ interests are aligned with their investors.

I think that argument needs to be exposed for the nonsense that it is.

Like everyone else, fund managers should be paid for doing their job. You do not pay your doctor a “performance fee” because her advice cures, nor pay your plumber a bonus because the pipe no longer leaks (imagine a plumber saying that he was charging more so that his interests were aligned with yours!)

Fund managers should do their jobs as well as they can and charge a fair fee for their work. A fund manager should try to beat the market without expecting a bonus for doing the job well. A job done well and a fair fee should be motivation enough for anyone.

Also, remember that Investment performance is about two things. Investment performance encompasses the returns that a fund manager gets but, just as importantly, the risk that the manager takes. I have said before in these pages that high returns are easy: managers can simply take on more risk to get high returns.

After all, fund managers do not put their own money at risk – to get that extra fee, it is your money that is risked. Fund managers can often beat their benchmark and get their performance fee, but it is your money that suffers when there is a loss.

I do not know of any fund manager who refunds fees in the event of poor performance. If they do not out-perform their benchmark, they continue to get their standard fee: they may have to forgo their performance fee, but they never refund investors because they have done badly.

From a manager’s point of view, performance fees are a one-way bet. They get an extra fee if things work out well, but do not refund when they mess up.

In any event, the motivation for performance only works on returns. There are some markets when motivation to lower risk might be more in the investors’ interests.

These fund managers may care little for risk with their investors’ money – they have only incentivised themselves on the returns side of the ledger.

Very few other industries charge a fee for performance; for most, good performance for a job is taken as a given. Fees, whether for a doctor, plumber or a fund manager should always be reasonable, fair and transparent.

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.

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