The fulcrum fee calculation won’t kick in for another 12 months, giving the fund enough time to build a track record. After that, the expense ratio will be adjusted monthly to reflect the trailing twelve months’ performance.
It’s not clear if other ETF providers will follow the lead set by AdvisorShares. “Most ETFs are built to mimic benchmarks, not exceed them, so many funds lack an incentive to outperform,” says Todd Rosenbluth, director of ETF and mutual fund research at S&P Global Market Intelligence.
Still, the approach makes sense in today’s environment, at least for actively-managed and smart-beta ETFs that do aim to beat a benchmark index. “With the new Department of Labor regulations coming into play, performance fees will be a growing consideration for many investors and advisors,” Rosenbluth says.
The AdvisorShares fund’s use of fulcrum fees serves as a sort of litmus test for investor interest. Indeed, even in the mutual world where several providers have adopted this model, it hasn’t always been greeted positively. In 2010, for example, TFS Capital LLC ditched fulcrum fees for its TFS Small Cap Fund (TFSSX). “We love the idea of performance fees and it's right up our alley, but we've gotten some strong feedback from advisers that the fund's fee structure is too complicated and they don't like the unpredictable nature of the fees,” said Larry Eiben, chief operating officer of TFS Capital LLC, in an Investment News article at the time.
In other words, flexible fees might present a marketing challenge.
The Mutual Fund Migration
If the use of fulcrum fees gains momentum in the ETF space, it may be because many mutual fund firms are now looking to create ETF equivalents for their leading funds. As noted, several mutual fund companies use fulcrum fees already, and they may deploy the same approach if and when they move into ETFs.
Fee pressures have proliferated throughout the investment industry, from hedge funds to mutual funds to ETFs. For any manager who claims to sustainably outperform the market, fulcrum fees offer a way to hold their feet to the fire.