Mutual funds basing fees on returns

NEW YORK – Mutual fund investors looking for money-back guarantees on Wall Street have often been told to keep walking.

Often, investors could simply grumble or try to shrug off the vagaries of investing but ultimately demand little of mutual fund managers. Now, a small but growing number of mutual fund families are using fees as a way to compensate shareholders for lackluster performance and even reward fund managers for strong returns.

Fees at eight of Dunham &Associates’ 11 funds are tied to performance. So, for example, fees at a fixed-income fund with an expense ratio of 0.3 percent might rise to 0.60 percent if the fund outperformed its benchmark by a substantial amount. On the other hand, if it underperformed by a significant amount, the fund would waive the fees.

“When the investors are experiencing euphoria, they don’t mind and in fact welcome the opportunity to reward their advisers. When the investors are feeling pain and abused … they’re annoyed about paying fees for sub-par results,” said Jeffrey Dunham, principal at Dunham, whose funds’ combined assets are worth about $400 million. “It creates a partnership where one does not exist today.”

He concedes what while investors might not save money overall with performance-based fees, they will feel relieved to pay lower fees should returns falter.

“It isn’t about the absolute price. It’s about price relative to value.”

Not all funds that aim to assuage customer concerns over lackluster performance regularly reduce fees. Charles Schwab &Co. last month expanded the number of its funds that refund the previous quarter’s management fee to dissatisfied investors. Sixteen of the company’s funds now operate under this model.

“We think it’s a fair proposition for the clients, and we are targeting clients who may not be used to investing in managed portfolios,” said Gregory Maged, vice president for advised solutions at Schwab Investors Services.

Schwab will consider adding the “money-back” guarantee to other funds as it determines how well it works with the first batch of funds. Maged said the company isn’t worried shareholders will abuse the offer because the company would work with them to mollify their concerns, perhaps placing them in another fund. To date, only one customer has requested a refund, Maged said.

While Fidelity Investments has since the 1970s adjusted fees on some domestic and international equities funds based on performance, the company’s board in February authorized the adoption of such fee structures for 19 additional funds. If approved by the shareholders of those funds, it would give Fidelity 68 funds with performance-based fees.

“We have found it make sense for shareholders because it more closely aligns our economic interests with theirs,” Fidelity spokesman Vincent Loporchio said.

Talk to us

More in Herald Business Journal

Members of Gravitics' team and U.S. Rep. Rick Larsen stand in front of a mockup of a space module interior on Thursday, August 17, 2023 at Gravitics' Marysville facility. Left to right: Mark Tiner, government affairs representative; Jiral Shah, business development; U.S. Rep. Rick Larsen; Mike DeRosa, marketing; Scott Macklin, lead engineer. (Gravitics.)
Marysville startup prepares for space — the financial frontier

Gravitics is building space station module prototypes to one day house space travelers and researchers.

Orca Mobility designer Mike Lowell, left, and CEO Bill Messing at their office on Wednesday, Aug. 16, 2023 in Granite Falls, Washington. (Olivia Vanni / The Herald)
Could a Granite Falls startup’s three-wheeler revolutionize delivery?

Orca Mobility’s battery-powered, three-wheel truck is built on a motorcycle frame. Now, they aim to make it self-driving.

Catherine Robinweiler leads the class during a lab session at Edmonds College on April 29, 2021. (Kevin Clark / The Herald)
Grant aids apprenticeship program in Mukilteo and elsewhere

A $5.6 million U.S. Department of Labor grant will boost apprenticeships for special education teachers and nurses.

Peoples Bank is placing piggy banks with $30 around Washington starting Aug. 1.
(Peoples Bank)
Peoples Bank grant program seeks proposals from nonprofits

Peoples Bank offers up to $35,000 in Impact Grants aimed at helping communities. Applications due Sept. 15.

Workers build the first all-electric commuter plane, the Eviation Alice, at Eviation's plant on Wednesday, Sept. 8, 2021 in Arlington, Washington.  (Andy Bronson / The Herald)
Arlington’s Eviation selects Seattle firm to configure production plane

TLG Aerospace chosen to configure Eviation Aircraft’s all-electric commuter plane for mass production.

Jim Simpson leans on Blue Ray III, one of his designs, in his shop on Friday, August 25, 2023, in Clinton, Washington. (Ryan Berry / The Herald)
Whidbey Island master mechanic building dream car from “Speed Racer”

Jim Simpson, 68, of Clinton, is using his knowledge of sports cars to assemble his own Mach Five.

An Amazon worker transfers and organizes items at the new PAE2 Amazon Fulfillment Center on Thursday, Sept. 14, 2023, in Arlington, Washington. (Ryan Berry / The Herald)
Amazon cuts ribbon on colossal $355M fulfillment center in Arlington

At 2.8 million square feet, the facility is the largest of its kind in Washington. It can hold 40 million “units” of inventory.

A computer rendering of the North Creek Commerce Center industrial park in development at 18712 Bothell-Everett Highway. (Kidder Mathews)
Developer breaks ground on new Bothell industrial park

The North Creek Commerce Center on Bothell Everett Highway will provide warehouse and office space in three buildings.

Dan Bates / The Herald
Funko president, Brian Mariotti is excited about the growth that has led his company to need a 62,000 square foot facility in Lynnwood.
Photo Taken: 102312
Former Funko CEO resigns from the Everett company

Brian Mariotti resigned Sept. 1, six weeks after announcing he was taking a six-month sabbatical from the company.

Cash is used for a purchase at Molly Moon's Ice Cream in Edmonds, Washington on Wednesday, Aug. 30, 2023. (Annie Barker / The Herald)
Paper or plastic? Snohomish County may require businesses to take cash

County Council member Nate Nehring proposed an ordinance to ban cashless sales under $200. He hopes cities will follow suit.

A crowd begins to form before a large reception for the opening of Fisherman Jack’s at the Port of Everett on Wednesday, August 30, 2023, in Everett, Washington. (Ryan Berry / The Herald)
Seafood with a view: Fisherman Jack’s opens at Port of Everett

“The port is booming!” The new restaurant is the first to open on “restaurant row” at the port’s Waterfront Place.

Tanner Mock begins unwrapping new furniture that has been delivered on Thursday, Aug. 24, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
In Everett, new look, new name for mainstay Behar’s Furniture

Conlin’s Furniture, based in South Dakota, bought the huge store and celebrates with a grand opening this week.