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Dec 06, 2017

Fidelity International to pass on research costs to investors

Fund group does not want to differentiate between those covered by Mifid II and those that are not

Fidelity International is to pass on research costs of more than $42 mn a year to investors.

The fund house has unveiled details of a variable management fee linking fees to performance and reveals that research costs amount to 0.0228 percent of the $185 bn in its equity funds.

Instead of absorbing European investors’ share of the resulting $42 mn under the new Mifid II regulations, Fidelity says it will pass research costs on to its clients. The decision leaves it among only a handful of large fund houses that have chosen not to absorb such costs themselves. Fidelity says it does not want to differentiate between clients covered by Mifid II and those that are not, and that it believes its chosen structure is the most appropriate.

‘We believe companies that adopt the hard-dollar approach for Mifid II clients are incentivized to lessen the extent and cost of research used to underpin their research decisions and that this will ultimately adversely impact client outcomes,’ Fidelity says in a statement.

The cost of research will ultimately be more than offset by a reduction of 0.1 percentage points on the base annual management charge under Fidelity’s new variable management fee, to be applied initially to 10 funds worth $31 bn in total.

The new charging structure is also designed to help resurrect the fortunes of active fund management by linking fees to performance, in response to huge outflows into passive funds that replicate the performance of an index. If managers beat benchmark returns after the deduction of the new base annual management charge and other costs, investors will then be asked to pay extra.

Outperformance of the benchmark by 2 percent or higher will cost clients 0.2 percentage points more than their standard fee, with performance between 0 percent and 2 percent above the benchmark charged on a sliding scale. Similarly, annual management fees will drop if Fidelity’s managers fail to beat their benchmarks.

‘We believe innovation in fee structures is essential if active fund management is to succeed,’ says Brian Conroy, president of Fidelity International, in the statement. ‘We believe this is a meaningful step and also one we hope will be adopted by the wider asset management industry.’

The charging structure will be applied to 10 of Fidelity’s pooled active equity funds from next March. Clients with their own segregated mandates, including pension funds and investment trusts, will be able to choose an adapted version of the model.

Investors switching into the new structure on the launch date will pay the base annual management charge for the first three months. Performance will then begin to be measured from the launch date, eliminating the possibility that investors pay for performance realized before the introduction of the structure.