In October last year, Fidelity unveiled its performance-based variable management fee(VMF) charging model and announced it would be passing on costs for external research under Mifid II to clients.
The firm said it would adopt a CSA-RPA model, implemented to ensure that all clients were treated equally whether they were captured by the Mifid II regulations or not.
However, this decision has now been reversed as the industry did not embrace the model. Following extensive discussion with clients, Fidelity confirmed it will not be applying a research charge to any clients, across institutional, wholesale and retail and irrespective of the investment vehicle or geographic location.
Paras Anand, chief investment officer equities, Europe said: “Our decision to absorb external research costs reflects our desire to act continually in the best interest of our clients.
“This approach is aligned with our single global research platform which underpins all our equity strategies. The overwhelming industry consensus has been to not embrace the RPA model which in turn means our clients, in most cases, would face disproportionate operational and reporting consequences were we to retain this approach.
“These client challenges and inefficiencies were not what we envisaged so we have decided to move to a Fidelity-funded research model, effective from 3 January 2018 when the new regime became operational.”
Meanwhile, Fidelity’s VMF model would see no changes and continues to align the investment manager’s fee to the performance that the client has experienced across active equity funds.
Anand added: “The headline reduction in the baseline annual management fee of 0.10% for the VMF share classes, now combined with our decision to absorb external research costs, will make Fidelity an even more competitive and aligned proposition for clients.
“We are pleased to say that we have seen a positive response and strong level of engagement on the VMF model from existing and new clients and are looking forward to the forthcoming launch of these share classes across a number of our flagship strategies.
“We continue to fully support the key objectives of Mifid II in its determination to bring greater transparency and fairness to clients.”
Only time will tell
Fidelity’s decision to backtrack on its initial choice to pass on costs has seen mixed industry reactions, yet the consensus view is that the future of absorbing these research costs remains uncertain.
Adrian Lowcock, investment director at Architas, said it is good to see firms trying different approaches to solve the problems facing the industry. He believes that Fidelity’s ideas have added value to the whole debate and the firm “have listened and responded quickly and clearly to the feedback they have received from their clients”.
He added: “It is good to see that the industry has reached a consensus approach which should make it easier and cheaper to access funds.
“However, the long-term impact of absorbing research costs is still unknown and could result in unforeseen consequences so fund groups, advisers and researchers need to remain vigilant to ensure this approach remains the right one for the industry and its clients.”
Likewise Jason Hollands, managing director at Tilney, said Fidelity’s announcement is “welcome news and a clear admission that they had got it wrong”. He explained that this decision “will heap pressure on remaining outlier firms”.
Hollands continued: “The impact of Mifid II on access to research and how the costs are covered has stoked much debate in recent months and it is widely estimated that the fund management industry in aggregate has significantly slashed spending on external research as a result of new regulations.
“Only time will tell whether or not this has an impact on performance or makes markets less efficient, as some observers suggest, or turns out to be the catalyst for a healthy clear-out of those analysts whose research is, on reflection, of little value.
“In this environment I do believe that firms such as Fidelity, which has long prided itself on the scale and strength of its own in-house platform and has therefore been much less reliant on external research, are in a relatively strong position.”
