Pay for performance. That’s the concept behind AllianceBernstein’s (AB) new FlexFee funds, a group of actively managed funds that charge only index-like fees if they perform in line or below their benchmark indexes and higher fees only if they outperform their benchmarks by a considerable amount.
Starting Thursday, advisors will have access to four AB FlexFee funds on platforms from Merrill Lynch, Morgan Stanley, Charles Schwab, TD Ameritrade, Pershing and LPL Financial.
Two are stock funds: the AB FlexFee Large Cap Growth Portfolio (FFLYX) and AB FlexFee US Thematic Portfolio (FFTYX), and two are bond funds: AB FlexFee International Bond Portfolio (FFIYX) and AB FlexFee US High Yield Portfolio (HIYYX).
The minimum fees for the stock funds are 10 basis points if they don’t beat their respective indexes — the Russell 1000 for the growth fund and the S&P 500 for the thematic portfolio — and the maximum is 1.10%, if they beat their respective indexes by 2.8% or more.
Fees for the two bond funds are similarly constructed but with different minimums and maximums: a 20 basis-point minimum and 80 basis-point maximum for the international fund (if it outperforms its index by 1.4%) and a 30 basis-point minimum and 70 basis-point maximum for the high-yield portfolio (if it outperforms by 1.5%).
All the funds have an annual reset so investors will never pay high fees based on performance in past years.
“We believe this is an important step for the active management industry to align our pricing with the new reality, which includes low-priced passive options,” Chris Thompson, head of the Americas Clients Group at AB, tells ThinkAdvisor. “Our hope is that this flexible fee structure gives advisors an opportunity to take that pricing issue off the table.”
Dean Ungar, a senior analyst Moody’s Investors Service, says the new AB FlexFee funds are “part of a process of active management trying to finding its niche in a world where passive investing has become so prevalent.”
Moreover, says Ungar, the concept “seems like a good fit if there is a fiduciary rule,” noting that firms seem to be operating under that premise despite the delay and now court ruling against implementation of the Labor Department’s fiduciary rule. (The SEC, however, is developing its own fiduciary standard.) “It will be interesting to see how the AB funds do,” says Ungar.
Thompson says he hopes other asset managers follow his firm’s example. He noted in a statement that AB “intentionally did not patent FlexFees” because it wants “to encourage industrywide adoption,” and it has already seen other asset managers file to offer similar products since AB announced its FlexFees plans last year.
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