By Ted Rechtshaffen, Tridelta Financial
Special to the Financial Independence Hub
It was time for a change in thinking.
Why can’t investment management firms share the risk with their clients? Why does it always feel like it is stacked in favour of the investment managers and not the clients?
The answer to those questions is that investment managers CAN share the risk with clients, but they don’t want to. TriDelta Financial launched in 2005 and has charged traditional fees since the beginning. Today, we felt that we had the right investment management and infrastructure in place, and it was time to introduce a new approach.
I know that we wanted to be known as a firm that thinks differently and acts differently. It was time to put our money where our mouth is. As a result we have just launched the TriDelta Partnership Fee. At a high level, if your investment returns are negative, your management fee is credited back to you. If your 12 month return is between 0% and 3%, you will have 0.5% credited back to you. If your 12 month return is over 7%, there will be a performance fee charged to your account.
For the longest time, the investment industry was set up in a way that was tilted in favour of the industry. In fairness, every industry works that way to some degree. What is interesting about the investment industry is that there is a lot of discussion about risk and reward. Of course, this is only in relation to the clients’ portfolio. For the investment firm the only risk has been ‘don’t do too poorly or you will lose clients’.
Sharing gain and pain
If a client is down 5% on their portfolio, the portfolio manager will still make their 1% to 2.5% fee. If a client is up 15%, the portfolio manager will still make their 1% to 2.5% fee. There is no question that all investment managers would prefer a higher return for their clients. Having said that, the clear disconnect is the sharing of gain or pain.
Even worse is the traditional hedge fund industry. The fees of 1% to 2% are considered a weak year for a hedge fund. They decided that if they do ok or well, they should get a ‘performance fee’. If they do poorly, they don’t give back anything. Essentially their fee model is “you do poorly, we do well, you do well, we do great”.
If a manager can deliver something truly exceptional they deserve to be rewarded. The problem is when the truly average are simply charging very high fees.
Our new Partnership Fee truly shares the risk. In fact, if you lose money in a year, your management fees will be returned to you. On the other hand, if you earn 7% or more, you will pay a performance fee.
In addition to being a model that better shares the risk, it also lowers the clients overall volatility, essentially lowering their downside risk.
No other Canadian firm has this kind of fee-sharing model
As far as we know, there is no other firm in Canada that has a similar fee sharing model. There is one firm that lowers your fee the following year if you have a losing year, but to some degree this is more of a way to keep you in place than truly sharing the risk.
I have actually wanted to launch a fee structure like this since the late 1990s when I was in Business Strategy at one of the Big Bank brokerage firms. At the time, they didn’t want to look at it further due to perceived compliance risks. After all, if everyone gets paid more for higher returns, there could be a possibility of investing in risks that are higher than appropriate for the client.
TriDelta manages this risk in the way our team is paid. Wealth Advisors and Portfolio Managers at TriDelta Investment Counsel are paid based on assets managed. For clients who choose a Performance Fee, those Wealth Advisors and Portfolio Managers will be paid the same regardless of whether there is a Performance Fee earned or fees are rebated. We still have a vested interest in solid performance, as most of our personal money is managed right along client’s money. However, we want to ensure that we always value capital protection properly and never only focus on the upside opportunities.
We already set the bar differently when we launched a hedge fund (on top of our traditional investment counselling and management) in 2013. The TriDelta High Income Balanced Fund was essentially a fund with all the tools of a hedged fund, but we refused to put in a traditional ‘performance fee’ on the fund. Today, it is a 5 star fund (Globefund) and is ranked #1 out of over 2,000 funds in the past year in the Global Neutral Balanced category, with a 1 year return over 16%.
I have no doubt that this type of fee structure will slowly become more available in Canada. For TriDelta, for today, we are ready to put our money and investment management confidence where our mouth is.
Ted Rechtshaffen is President and Wealth Advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. Prior to launching TriDelta in 2005, Ted was VP, Business Strategy at a large bank owned brokerage firm. Ted has an MBA and CFP, and was named one of Canada’s Top 50 Financial Advisors in 2015 by Wealth Professional Magazine. He can be reached at firstname.lastname@example.org, 416-733-3292 x221 or 1-888-816-8927 x221