Berry has just completed a review of performance fees and says that some of the practices in the market need to change.

“If industry won’t self regulate then the FMA should step in and it should be prescriptive (in its approach)," Berry told delegates at the SiFA Conference in Christchurch this week.

He isn't against performance fees, rather he would like to see better disclosure about how they work and what they mean for investors.

The only manager he was prepared to name at the SiFA conference was Fisher Funds which provided a clear explanation and examples of how its performance fees worked.

Other managers made it very difficult for investors to understand the fees.

“It is not done by accident,” he says. Rather it is done by “clever drafting of documents.”

Most people would not be able to pick up what was happening when they read the documents, he said.

His message to advisers was to “be direct” when questioning fund managers.

“Good disclosure is absolutely critical,” he said.

Amongst the issues identified are that some managers have inappropriate benchmarks for their performance fees.

Berry says an equity fund should have an equity-related benchmark, not a cash one.

He also was highly critical of managers who double-dipped on fees which had high water benchmarks. In some instances managers claimed a performance fee when they reached a high water mark. However if the fund fell below that benchmark then went through it again the manager would claim the fee for a second time.

A third issue he identified was when a manager used an international fund. He said much of the outperformance would not make it to the investor as both the international manager and the local manager were each taking a performance fee payment.

To read more on Pathfinder’s research read this feature in the Good Returns Investment Centre.

The perfect performance fee: Part One

The performance fee: Part Two