Innovation Failing To Win Over Fund Buyers In Race To 'cut Fees To The Bone'

FE data shows the average OCF for the main share classes of all 3,641 Investment Association funds is 0.98%, ranging from zero in primarily passive vehicles to 7.25% in the HC Charteris Property fund.

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However, the growth of passives, regulatory pressure and evolving investor appetite have driven a number of firms to innovate with regard to their fund fees.

Last November, Artemis announced its intention to switch to swing pricing from February 2019 and replace variable costs with an administration fee model, while Rathbones also decided to move to a single-pricing structure on seven of its dual-priced funds in an effort to reduce the effects of 'dilution' on shareholders.

Elsewhere, Fidelity replaced performance fees and fixed annual charges with a new variable fee across a number of products last year, while Brewin Dolphin set out to reduce the costs on its Managed Portfolio Service by £3m a year by moving a bulk of investments into third-party funds.

Meanwhile, performance-only fee models have perhaps seen the most notable shake-up when compared to the traditional model.

One such example is Tellsons and its only fund - Endeavour - which was born in response to the Global Financial Crisis as an attempt to align the firm's interests with that of investors while providing good value for money.

Tellsons offers UK retail investors a performance fee as an option via a 'PF' share class, which guarantees that if the Endeavour fund does not beat its benchmark on a quarterly basis investors only pay a 0.24% annual fund administration fee. 

Michael Lindemann, partner at Tellsons, believes most of the interest in the PF share class comes from 'DIY investors' who are not using a platform and "have objections to the amount of money the industry is earning".

He added if the firm were able to grow its assets it would be able to innovate further when it comes to fees, with plans in place to "reduce our fund administration fee, which currently runs at 24bps, allowing us to be incredibly competitive alongside the passive community".

However, Lindemann said the PF fee is currently taken up by around only 10% of the fund's investors and therefore "is not for everyone", with the vast majority of investors opting for a potentially higher - but fixed - fee. 

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Similarly, Orbis Investment Management does not charge an ongoing fee and instead has a performance-related fee, which is refundable in times of underperformance. It also offers the chance to invest for a minimum of £1.

UK director of Orbis Dan Brocklebank recently told Investment Week certain D2C and adviser platforms were uncomfortable with the model and, as a result, limited the firm's capacity to grow.