He said there were a number of absolute returns-style managers who structured their performance fees so they were rewarded on a cash-rate-plus basis.

That meant finds could ride equity markets up, and perform barely above the index, and still charge performance fees of up to 5%, he said.

Some managers would have a higher rating on Morningstar’s database if they had fairer fee structures, he said.

The FMA issued a guidance note last year, which described how performance fees should be disclosed, and said when a fund’s hurdle rate of return is linked to the performance of a market index different to the comparative index, this should be clearly disclosed in the PDS so that prospective investors understand the implication.

But Douglas said that had made little difference. “We haven’t seen any behaviour change as a result.”

Fisher Funds charges a performance fee on its growth KiwiSaver fund, which is equal to 10% of any return that is more than the OCR plus 5%. The fee is capped at 2%.

Milford’s active growth fund takes 15% of  performance over 10%.

Fisher Funds chief executive Bruce McLachlan said that could sometimes benefit investors because they would not pay the performance fee, even if the manager had beaten other fund managers and the index, but had not delivered sound real returns. “Even if we are doing well compared to others, if the client is not doing well, there’s no performance fee.”

Performance fees were a way to align client and manager motivations, he said.

The highest performance fee ever charged by the growth fund was 1.41% in the year to June 30, 2013.

Fisher Funds also uses a high-water mark, so that managers cannot be rewarded for the same results twice.

McLachlan said Fisher Funds had been transparent about its fee structure and the FMA had not raised any concerns.

An FMA spokesman said: "The law states that a comparative index must be used, but it also allows the hurdle rate for performance fees to be linked to an index other than the comparative index.

"In our guidance, we have said it is reasonable for the hurdle rate for performance fees to be linked to the comparative index. We have also said that where the hurdle rate is linked to something different, that should be clearly disclosed and explained. That remains our position."

He said where the FMA saw disclosure that did not meet legal requirements, it would engage with the provider to improve it. That would also be the case where disclosure was not consistent with its guidance.

"We expect providers to be able to explain to their investors why the hurdle rates and benchmarks they have chosen are reasonable. And we encourage investors to question their providers about that."