A majority of mutual fund companies are reportedly steering clear of performance-based fees, despite the positive incentive they may provide to fund managers.

Used by many hedge funds, such fees are often championed as a means of aligning managers’ best interests with those of their clients. However, according to figures cited in a MarketWatch article, only about five percent of mutual fund companies operate under a system that charges performance-based fees, instead calibrating charges according to the size of a shareholder’s total assets.

In part, this may be because the performance-based concept is more complex than it first appears. Because the gauge is always past returns, some investors wind up paying for successes from which they did not profit, and this can leave funds open to SEC censure. Although long favored by industry leaders Fidelity and Vanguard, performance fees were axed by Accessor Capital Management of Seattle after the SEC came after the firm for overcharging. Bridgeway Capital Management paid monetary penalties after a similar investigation in 2004.

Nonetheless, Denver-based Janus Capital Group instituted performance fees just this year, showing this tactic for boosting investor confidence still has its adherents. 

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