Performance fees - who needs them?

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Fund managers shouldn't charge performance fees for doing their job, says one industry figure who likens it to a plumber charging a performance fee for fixing a toilet.

Tuesday, January 24th 2012, 6:00AM 4 Comments

by Niko Kloeten

In response to a recent Good Returns story about Harbour Asset Management's survey of performance fees, Pathfinder executive director Paul Brownsey said there was a bigger question to be asked: why have performance fees at all?

"How many other businesses require a performance fee in order for the service provider to do the job they are supposed to do?" he said.

"Do you pay your plumber a performance fee when he keeps the toilet flushing? Do you pay your internet provider a performance fee when access is uninterrupted?

"Do you pay the gardener a performance fee when the flower bed looks nicer than usual? Or an example some finance company directors may appreciate, do you pay your lawyer a performance fee when the sentence is 18 months instead of 2 years?"

Asset managers and advisers are in the core business of "attempting to provide the best possible return to their clients," Brownsey said.

"Why does a performance fee mean the asset manager will do a better job of this?"

He said he would have no problem with performance fees if they worked both ways, "i.e., the manager pays the investor if the fund underperforms."

Harbour Asset Management chief operating office Jody Kaye said he understood Brownsey's sentiment.

"That's a fair comment but it comes back to the quantum of fees, both base management fees and performance fees.  We charge the lowest base fees in the New Zealand marketplace [1%] but we have more upside if we have good performance.

"Managers who charge a base management fee of 1.5% and also charge performance fees need to take a look at themselves."

Kaye said that although managers have to disclose how they calculate their performance fees, it isn't always easy for investors to work out what the result will be.

Financial advisers also need to pay close attention to fees and how they're calculated, he said.

"Advisers need to factor in the consequences of both fees and make sure they can understand what it's going to be based on.

"If the market does 25% and your fund does 15% but it outperforms cash by 10%, are you happy to pay a performance fee for that?"

Kaye said New Zealand's base management fees were generally higher than in Australia, where there is more emphasis on performance fees.  New Zealand would likely move in that direction as the market matured, he said.

He wouldn't name the funds that had been looked at in the survey but said they were the "top 12" brands with large Australasian equity mandates and were "well known".

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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