The current investment industry fee model is a 'heads we win, tails you lose' scenario for clients, the head of UK for Orbis Investments has claimed.
Speaking to FTAdviser, Dan Brocklebank said advisers should push managers on what they mean by saying that their "interests align with the clients".
He said it was important to understand what that meant and to show clients that fees are truly fair and proportionate - because too often, they are not, he claimed.
Brocklebank said: "Even the best fund managers will go through periods of underperformance during their career. That’s inevitable. If you look over history though, the best time to invest with a good manager is after a period of under-performance.
"Human nature tends to pull us in the opposite direction though – studies show most investors chase strong performance."
But if funds charge a fixed percentage of AUM even when they are underperforming, those fees effectively exacerbate the underperformance and make it harder for clients to invest, or remain invested, through the inevitable down cycles.
He said another way of thinking about it, is that when funds charge clients on the basis of a percentage of the amount invested with them, clients will pay that fee regardless of the investment performance they generate.
As a result, Brocklebank said: "The current industry fee model is equivalent to the proverbial “heads, we win, tails you lose” proposition for clients."
According to him, Orbis Investments wanted to try and improve the proposition for clients by offering a fee structure that was equivalent to “we (the manager) can only win if you (the clients) do well”.
The UK funds therefore have a fee class that charges a zero base fee where the manager absorbs the fund’s operating expenses – so if all the managers do is perform in line with the index, then it will still be cheaper than a tracker fund.
In exchange, 40 per cent of any outperformance is charged as a fee but placed into a fee reserve rather than being paid directly to the manager.
He said the amount in this reserve is available to pay refunds to investors in the event of subsequent underperformance in the same 40 per cent ratio.
Brocklebank explained: "We, the manager, only draw a fee when there is an amount in the reserve. This fee is limited to 1/3 of the value of the reserve on an annualised basis, and has a hard cap at 2.5 per cent to prevent ‘windfall’ payments.
"The net effect is that we have to generate and sustain investment outperformance in order to earn a fee."
He added: "Unlike elsewhere in the industry, clients should want our fees to be as high as possible because that would mean we have done a great job for them by beating the benchmark.
