Remuneration and how it drives behaviours is still a crucial battleground in the fight to win clients’ trust, according to boutique fund managers.
Ewelina Niziolek-Wilson, head of people and improvement at Castlefield, and Dan Brocklebank, head of UK for Orbis Investments, said a fundamental aspect of showing corporate integrity was the way fund management groups incentivise their fund managers.
Both said companies should consider whether existing remuneration structures best serve clients, best support managers and best reflect the company’s “broader values”.
Niziolek-Wilson said: “Remuneration is one of the most powerful tools for employee engagement. While pay is a key motivator, it can also be a demotivator if not managed correctly.
“Striking the right balance is challenging. While rewarding individual behaviours with bonuses can boost short-term performance, it may also lead employees to focus solely on KPIs, neglecting the company’s broader values.”
Brocklebank said it was a matter primarily of aligning interests.
He explained: “The most important thing is to create what economists refer to as an alignment of interests. Put simply, you want to make sure that everyone is aiming for the same destination.”
It is vital that firms make sure they are not solely focused on a fund’s profitability over value for money for investors.
But Broklebank said a typical problem with investment industry remuneration structures is that clients want better investment returns, but investment firms can be tempted to focus on growing AUM because their fees are typically calculated as a percentage of total assets under management.
He said this was a problem because: “Achieving better investment returns is one way of growing AUM, but only one. More importantly at some point scale becomes a headwind to performance too.
“Improving investment returns is also much harder than launching new funds or marketing heavily. So, commercial pressures can tempt firms towards focussing on sales and marketing, while running not very active portfolios on the investment front.”
Ways to improve
As an employee-owned business, everyone at Manchester-based Castlefield shares in the success through the EO Bonus. Niziolek-Wilson described this as an annual reward based on collective, not individual, performance. This approach promotes team accountability and removes the focus on personal gain.
She added: “Co-owners can also acquire shares in the business through direct purchase or our Share Incentive Plan.
“This long-term strategy not only looks after our people but encourages them to ensure the business thrives, boosting share value and turning profits into healthy dividends.”
Castlefield also believes in non-cash recognition through its internal ‘Core’ awards, which celebrate behaviours that reflect the company’s values.
Orbis aims to align the interests of clients, the firm and staff as closely as possible around what clients want the team to achieve: which is, as Brocklebank put it, “superior long-term investment results”.
He said: “This starts with how we charge clients for our investment services, which is overwhelmingly linked to the value we add on their behalf, and then flows through the entire organisation in terms of pay and remuneration depending on the role each individual plays and what they can influence.
“Fundamentally, we do well as a firm, and individually, if our do clients well. So, the long-term value we deliver for our clients influences pay and remuneration for everyone at Orbis. We all know who the real bosses are.”
This is also reflected in the fact Orbis will refund performance fees paid when the manager underperforms, so the company is penalised for failing to deliver value, just as it rewards managers for superior returns.
Regulatory view
The issue over fund manager remuneration is not new: the Financial Conduct Authority has been exploring issues around remuneration and fund manager fees for years, something which has come into greater focus post Consumer Duty.
Last August, the FCA looked into fair value assessments at investment management firms in the light of the consumer duty obligations, which came into force in July 2023.
At the time, Camille Blackburn, director of wholesale buy-dSide at the FCA, said: “It is vital that firms make sure they are not solely focused on a fund’s profitability over value for money for investors. The Consumer Duty, which is now in place, further supports our expectations in this area.”
Among other things, the review found “significant differences between good and poor practice in how AFMs assess their funds’ performance”.
Moreover, it found: “Firms putting too much emphasis on comparable market rates to justify their fees, rather than conducting an assessment using the full range of value assessment considerations.”
simoney.kyriakou@ft.com