Performance fee based remuneration structures for investment managers are often misunderstood, according to consulting firm Round Tower Solutions (RTS).
When combined with a reduction in base fee, performance fees can lower the fees paid to underperforming managers, the firm said.
"The recent Stronger Super response to the Cooper Review accepted the proposal that the use of performance fees be restricted," RTS managing director Aongus O'Gorman said.
"Unfortunately, the review failed to consider the practical portfolio implications of fixed fee structures. Underperforming managers on fixed fees create a significant fee drag," he said.
"Performance fees don't make good managers better, but when combined with reduced base fees, they certainly result in lowering the level of fees paid to underperforming managers."
O'Gorman said he opposed any restriction on performance fees, because this would potentially reduce efficiencies for investors, he said.
But the global financial crisis also brought to light the limitations of performance fees.
Some managers closed down funds prematurely, because their performance fee structure would require them to operate without receiving any fee income for an extended period of time.
O'Gorman acknowledged that this was a risk.
"It is a known risk and there should be a balance between the base fee and the performance fee," he said.
