From the 1st of June, clients will get the option to pay zero fixed fees and a performance fee of 20% on all outperformance the EDHEC indices achieve compared to their cap-weighted counterparts. Though EDHEC predicted its move “will disrupt the traditional model of fixed fees on assets under management”, it expects existing mandate clients will not take up the offer.
“We will propose this new option to all our clients, but they have all had outperformance [over the past three years]. So they will probably not sign up for the zero fixed fees model and instead keep paying management fees,” said Noël Amenc, CEO of ERI Scientific Beta.
The new pricing model is targeted at attracting new clients instead, as ERI hopes the option of zero fixed fees will convince prospective clients to test the waters of smart beta. “Large numbers of asset owners stay out of smart beta because they think fees are too high for a product that is perceived as passive,” Amenc explained. Currently, ERI has some $10bn (€8.9bn) in assets 'under replication', as oit puts it.
The Frenchman nevertheless does not expect other smart beta providers to follow ERI’s lead. Its competitors tend to charge lower fees than ERI, but their smart beta ETFs don’t have the same track record of outperformance, he says. “They will go to the regulator and try to block this new fee structure, saying it will lead to more risk-taking in order to pocket a performance fee.”