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W & K

FMA Seeks Clarity about Performance Fees

The FMA recently requested submissions on its draft guidance document on fees and returns from managed funds. This is an area that has been somewhat lacking in the past. It has been very difficult to make a real comparison between the total fees charged by Fund Managers on their respective funds.

Essentially there was some inconsistency in how performance-based fees were disclosed in disclosure statements under the Securities Act, and how managers were calculating 0% PIR returns and fund charges.

Most concerning was how performance fees were being calculated, particularly those who used a performance based fee without a high-water benchmark, or fees linked to what the FMA considered were inappropriate benchmarks.

Currently the FMC regulations require managers to provide an example of how fees apply to investors. Within the example, managers must disclose the effect of any applicable performance fee.

Some funds currently base their performance fee on a hurdle rate of return linked to a market index that does not fairly reflect the asset class and risks of the underlying investments. An example is equity-based funds that use a 90-day bank bill index as the hurdle rate of return. A fund could underperform against the appropriate market index but will still be paid a performance fee.

The FMA would like clear disclosure of fees and how they are derived in the PDS (product disclosure statement).  So if there was no high-water mark, that should be clearly disclosed, and if there was, what they called an “inappropriate index” being used, this should also be made clear so investors could understand the implications of that.

Some of the submissions were of the opinion that the FMA was overstepping the mark. Legal firm Kensington Swan who provide advice to a number of fund managers made a submission saying it was incorrect for FMA to describe such benchmarks as “inappropriate”.

They described it as “a commercial matter, and should not form part of FMA’s regulatory guidance. Provided the hurdle rate is clearly identified, and where it differs from the appropriate market performance measure that distinction is clearly and effectively disclosed, that should be the end of the matter. Hurdle rates that must be surpassed before a performance fee is charged may differ from the relevant market index measure for a number of commercial or marketing-related reasons, many of which may be reasonable.”

We believe that there is only likely to be uniformity in fee disclosures, if the appropriate regulator makes it a requirement. The industry has had a number of years to sort this out. It has to be consistent amongst all players. It is going to be difficult to get uniformity because it really needs to encompass all sorts of investment funds including listed property funds and exchange traded funds.

In the meantime, the key should be that if a manager chooses to structure a fee in a certain way, it should be disclosed in a way that investors can understand before they invest.


Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.