Fidelity Chair Johnson Explains Shocking Fee Change

'Is a flat fee fair, regardless of the value being delivered?'

401k, fees, Fidelity Investments, retirementThe latest salvo in the low-fee fight.

More about Fidelity International’s surprise announcement last week that it will charge lower fees for underperformance and higher fees for outperformance on the active funds it manages.

Abigail Johnson, chair of Fidelity’s international and domestic arms, took to the pages of The Financial Times on Monday to elaborate further on some of the thinking behind the decision. While the announcement itself might have been shocking, the reasoning clearly wasn’t.

“Asset managers have typically charged a flat fee for active management …But is a flat fee fair, regardless of the value that is being delivered?” the billionaire scion of the Johnson family wrote. “Too often this model leaves us open to accusations of overcharging for mediocre performance. In a world increasingly dominated by index funds that allow cheap access to markets this is clearly unjustifiable.”

Performance fees are even more egregious, she continues.

“On top of the base fee, they add further charges when the manager does well—heads we win, tails you lose. We need a fundamental rethink of the way asset managers charge their clients. Fulcrum fees have been used in the U.S. since the 1970 —charges that rise when the fund outperforms, but fall by the same amount when the fund underperforms. Simple.”

Only those companies “with courage to really listen to their clients and to take a long-term view will disrupt themselves. And disrupt we must,” Johnson concluded with Yodian flourish.

Seen as more in tune with the fee-based movement and an effort to “sit on the same side of the table” as their clients and shareholders, Johnson and the company gave no indication of when (or if) it would happen with its U.S.-based business.

“We have listened to the criticism of the asset management industry and rethought our approach to charging clients,” Fidelity International President Brian Conroy told reporters last week when announcing the pricing change. “In the future, we believe the vast majority of funds will charge on a variable basis as well.”

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