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Death of the Fixed 1% Fee

“One of the biggest problems I have with the flat-fee structure is that it does implicitly incentivize a culture of asset gathering.”Matthew Spencer, Director at Orbis Investments

We have written about the origins of our progressive fee structure .  Our fees are clearly outlined on our website for full transparency.  We are excited to share that there is a better alternative than writing a blank check for the promise of outperformance.  Much to our pleasure, some forward-thinking investment managers are getting the message and blowing up the fixed 1% fee.  This validates our unique client-centric fee structure, and the broader movement is a positive development for investors. 

The Movement

Fees & Ticks

“The industry is confident about its abilities, but when you say, ‘let’s share some of the downside,’ it is a different matter.”  - Andrew Clare, Professor at Cass Business School (London)

AllianzGI Takes Aim at Passive Investing with Low-Fee Mutual Funds*

“We are candidly putting our money where our mouth is.  We will not get paid until we outperform.  That is the value proposition here and a very key part of our offering.”Chris Thompson, Alliance Bernstein’s Head of Institutional & Retail Fund Business

Performance Fees:  An Idea Whose Time Has Come

“This has meant investors in active funds have typically paid the same fee regardless of how well the funds have done. Crush the benchmark? That’ll be 1% please. Get annihilated? 1%.” - Jeffrey Ptak, CFA

It’s Time for Fees to Go Even Lower

“Some investors argue that performance-based fees create an incentive for managers to take excessive risks in pursuit of a fee bonanza. But flat fees create similar motivations without offering any discount on the downside.”Jason Zweig, Wall Street Journal

Do Fees Tied to Performance Encourage Risk-Taking Behavior?

Possibly.  Pure Portfolios recognizes fees tied to upsideperformance could incentivize excessive risk-taking.  That’s why we don’t take an extra fee for outperformance.  Rather, we discount fees if we fail to meet a set hurdle rate.  For example, if a client portfolio does not meet or exceed said hurdle rate at year-end (net of fees), we would discount fees by 25% for the next 12 months.

We believe fee structures should encourage prudent wealth management rather than asset gathering behavior.  If investors are going to pay a fixed percentage of assets fee, it should be much less than 1%.

Our Prediction

Traditional wealth management firms that charge a fixed 1% fee based on assets under management will try and hold on to their profit machine until the end of time.  Like the floundering mutual fund industry, they will be forced to adopt more progressive, investor-friendly business models.  Investment management firms and advisors that resist change will be left behind.

*We should note Vanguard, USAA, Fidelity, Janus, Putnam have active mutual funds that use performance-based fee structures. 

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