Fund fees are a hot area, and not just in terms of them falling in absolute terms. While everyone is aware of Fidelity’s new zero fee index funds and the price war going on in top line fees, there are also new and interesting fund structures emerging. One kind of new fee model is called a fulcrum structure, where fees are low (ETF-like) unless the funds outperforms its benchmark, in which case the provider gets a performance fee. This kind of structure is more popular with mutual funds and can offer the best of both worlds—low fees for ordinary performance, or outperformance that comes with active management.
FINSUM: We think these kinds of funds offer a better alignment of interest while offering multi-sided benefits. However, the risk is that managers are incentivized to take excess risk in an effort to boost performance over the fulcrum threshold.