Fulcrum fees reflect true performance

Performance the key to fulcrum fees.


By Krystine Lumanta

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Fulcrum fees, which are regarded as genuine performance fees as they can only be charged if the return on a portfolio exceeds the benchmark, should be embraced and implemented across the industry, according to new research.

The Macquarie University study, “Regulation of Financial Plans and Allocated Pensions”, revealed the various fee methods administered in financial plans in Australia remained complex, despite the industry’s shift to better transparency.

“The actual fee structures are amazingly complicated,” Macquarie University department of economics professor Geoff Kingston, who led the research, said.

“We’re pushing the idea of less fees for the financial planning community.”

Fulcrum fees would replace other complicated performance fee structures, such as controversial asset-based fees that charged clients a percentage of their assets under management, Kingston said.

“A fulcrum fee is a performance fee and it’s symmetrical, unlike usual performance contracts, so that means if the portfolio performs worse than the benchmark, then the financial planner has to pay money to the client,” he told the Centre for International Finance and Regulation symposium on market and regulatory performance in Sydney on Thursday.

“We like this United States practice: if you’re outside a hedge fund structure and you’ve got an unsophisticated investor, you tend to get pushed by [US] regulations into fulcrum fees, which are symmetrical around an asset benchmark and reward genuine performance.

“I think they’re a good idea and should be encouraged here because we have a big problem with ‘index-hugging’ in Australia, so fulcrum fees would help sort out those problems.”

He said following the example of the US, fulcrum fees should be the only performance fees unsophisticated investors paid.

His research also highlighted the need to reappraise the frequency of financial plan reviews.

“We like the Canadian approach whereby you don’t have a fixed two-year schedule,” he said.

“They use a contingent or trigger basis for an immediate review of the financial plan - for example, when a client’s life circumstances change.

“There needs to be some sort of contingency or trigger [adopted in Australia] that ensures reviews of financial plans.”

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