The European Securities and Markets Authority (ESMA) has today launched a consultation on fund performance fees - https://www.esma.europa.eu/press-news/esma-news/esma-consults-performance-fee-guidelines-retail-funds-seeking-greater
Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“There’s nothing wrong with performance fees, per se, as long as investors are clearly told how they are structured, what they’re paying and they are based on realistic measures. The danger is that their complexity and the way they are communicated mean that many investors have little hope of understanding what fees they are paying.
“A lot of what the regulator says is common sense, but not currently implemented by some in the industry. ESMA says that fund managers should ensure investors understand how the performance fee works, that such a fee applies to the fund and the impact it can have on returns. A number of fund managers are still using industry jargon to communicate performance fees to investors. The suggestion by the regulator to include graphics and calculations to help investors understand how the fees work will go some way to battling through this confusion.
“ESMA has also reinforced the fact that the benchmark for a performance fee should be ‘appropriate’ for the investment objectives and aims of each fund. We’d hope that this ends the practice of some performance fees being based on beating the Bank of England base rate, which has been sitting at historic lows for a decade now, and providing a very low hurdle for funds to beat.
“A performance fee that is pegged to the LIBOR rate or Base Rate could well mean that investors are being charged a fee when their investments are failing to keep pace with even cash returns. Instead they should use an appropriate market index or a measure of inflation, which would mean investors’ money is at least keeping pace with rising prices before they are charged a performance fee.”