Fidelity delivers fees and MiFID II shocker

Fees_calculatingThe fund management firm Fidelity International said it was responding to scrutiny of active management when it announced lower charges for its services.

The firm is to introduce a variable management fee model across its active equity offering, which will involve cutting its annual management charges (AMCs) and changing performance fees.

Yet in the same price-busting announcement, Fidelity said it would continue to partially charge clients for broker research – but that the reduction in fees would “exceed and offset” these charges.

Fidelity’s president Brian Conroy announced the two decisions yesterday and said the restructuring of fees laid down a challenge for other asset managers.

However, Fidelity’s stance on broker research bucks the recent client-appeasing trend for high profile firms to start carrying the cost of stock and bond research themselves.

Fidelity’s new fee structure operates as a sliding scale, sharing the spoils of outperformance with clients, and compensating them for underperformance.

This “two-way sharing of risk and return”, or “fulcrum fee”, means outperformance net of fees will be shared “in the upside”, and if returns are only the same as the benchmark or below, clients will see lower fee levels.

Fees will sit within a pre-determined maximum and minimum range.

Conroy said: “These changes will more closely align the performance of our business with the performance of our clients’ portfolios and deliver what we believe clients and regulators are looking for.

“Our fee structure will give back for underperformance of the benchmark, whereas others do not.”

But in the same breath, Fidelity possibly surprised many by saying the firm will share research commission payments with clients rather than pay them all by itself.

Conroy said the broker-research debate, which stems from the MiFID II regulation, has focused “singularly on which model asset managers will use to pay for external research, rather than the total cost of asset management services and the value they deliver”.

Fidelity said it wanted a consistent approach to broker research costs across its global business and that sharing commissions in a more transparent way through ‘research payment accounts’ stipulated by MiFID II, was the way to do this.

MiFID II, which is almost shaming firms to start paying for broker research, only applies to asset management customers in the EU, which is a problem for firms with a global client base who might have to treat customers differently.

MiFID II is also a problem for smaller firms who may consider themselves less able to foot research bills and who have no internal research ability, unlike many large firms such as Fidelity.

Fidelity, which has £233.4 billion (€264 billion) of assets under management, also said that for clients who “simply want to drive down costs and do not want to pay for the active approach, we will be extending our successful range of low cost index funds on a global basis, accessible to all clients”.

Conroy added: “Having looked at the implications of upcoming regulation, as well as taking into account feedback from the UK regulator in its recent market study on the lack of pricing innovation in our industry, we believe that a far more fundamental change to how clients are charged needs to be instituted.

“We are passionate about giving our clients both choice and value and these changes will even better align our services directly to their needs and expectations.”

He said Fidelity would work with all its clients over the coming months to discuss and implement these changes.

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