EDHEC Business School has welcomed Fidelity’s announcement of its plans to introduce performance-based fees but it has warned that strong focus on price would lead to a loss of interest in the quality of products.
According to EDHEC, such a decision was a very good response to asset owners’ and consultants’ excessive focus on price reductions alone however it warned that exclusively focusing on price favoured a genuine phenomenon of adverse selection.
This would lead to a loss of interest in the quality of products and therefore would incite operators to neglect quality and reduce their research and risk control fees in order to win the price war.
However, EDHEC said it welcomed the fact that by linking fees to performance, Fidelity, like Allianz Global Investors and Alliance Bernstein before them, allowed investors to question other aspects of the investment management offering than the price only.
Associate Dean for Business Development with EDHEC Business School and chief executive of a provider of a smart beta indices platform, ERI Scientific Beta, Noel Amenc, said: “We are currently witnessing a highly worrying phenomenon of in-sample optimisation of the performance and factor intensity of smart beta indices to the detriment of their robustness, with a fairly cynical strategy of ‘sell and forget’”.
“By linking fees to performance, investors have the possibility of putting pressure on the quality of the products that are offered to them.”
He added that in the coming weeks ERI Scientific Beta would update its variable fee scheme, which would allow investors to pay zero fees if the Scientific Beta multi-factor multi-strategy index chosen does not outperform the reference index over the year.
“We think that in all logic Fidelity should also reduce their fees to zero if they underperform the benchmark, which is not the case in their fulcrum fees proposal.”
