Looking Beyond the Base Fee

This article was written by Michael Block and Ben Evans of Bellmont for the Investment Innovation Institute and published on 26 May 2026.

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Performance fees can be complex and when implemented poorly can cause issues with unit pricing, manager alignment and style consistency. But there are some very good reasons why a thoughtful performance-fee structure is worth considering, Michael Block and Ben Evans of Bellmont write.

Expensive management fees undeniably contribute to the fact that 95 per cent of active global equity fund managers in Australia underperform the broad index over the long term. A similar tale is true in large-cap Australian equities, with 88 per cent underperforming the index over the same period.^[1]

These stark figures are not necessarily indicative of a lack of manager skill; rather, they highlight how high base fees and additional performance-based fees (PBF) eat away at investors’ long-term net returns.

This drag often pushes performance below that of the broader index, which by comparison can be accessed for a fraction of the cost. While active managers often frame higher fees as a proxy for exclusivity or higher quality, the reality is that high, unconditional base fees often allow underperforming managers to profit at the expense of investors.

At Bellmont, we are very clear in our belief that lower base fees and higher performance fees provide better alignment between investors and managers. After all, why should managers be paid high fees for underperformance of the index?

A big shout out to Fiona Trafford-Walker (former Managing Director of Frontier Advisors) and Ian Patrick (then Chief Executive Officer of JANA, now Chief Investment Officer at the Australian Retirement Trust) for their research and recommendations on fee structures and alignment of interests.

One of the best examples of alignment between investors and a fund manager is Solaris Investment Management, and the ‘Performance Alignment’ unit class of its Core Australian Equity Fund [SOL0001AU] – a fee arrangement that charges zero base fee (!) but keeps 30 per cent of the excess returns above the S&P/ASX 200 benchmark hurdle.

“Fees only apply if the fund outperforms“ is an extremely powerful message.

It may sound as though our preference for PBF is just a thinly veiled attempt to chisel lower active management fees. In fact, that couldn’t be further from the truth; it would be our great pleasure to write a large cheque to a manager for outperformance.

For example, the alternative share class of the same Solaris fund charges 0.90 per cent p.a. with no performance fee [WHT0012AU]. Should the fund outperform its benchmark by more than 3 per cent p.a. (as has been the case in the past), Solaris would earn more fees under the Performance Alignment structure than the base fee structure.

Should Solaris deliver those results for investors, we believe it has earned any additional fees and everyone walks away happy. Exhibit A below illustrates the payoff relationship of both fee structures:

It appears investors agree with us – around 80 per cent of the ~$1.4 billion allocated to the strategy at 28 February 2026 is invested in the Performance Alignment share class.^[2]

Solaris has made this concept easy for investors to understand as it offers both fee structures. Most other managers set both a benchmark and a performance target, usually a fixed percentage above that benchmark over a stated period.

For example, if a fund manager targets 4 per cent p.a. outperformance of its benchmark with a 1 per cent p.a. base fee and no PBF, there is limited jeopardy should they underperform and a clear misalignment of interest.

Instead, why not test the manager’s conviction via a fee structure under which, if the target is met, they generate higher fees? Exhibit B below shows that under performance-aligned structures, this manager begins to earn performance fees with outperformance of its benchmark, but generates considerably more in fees should the 4 per cent outperformance target be met. How’s that for alignment of interests?

The fee structures we prefer will ALWAYS result in a fund manager making higher fees if they achieve their advertised alpha targets. We find that a lack of interest in engaging in these performance-based incentives is often a telling sign of a manager’s conviction. It suggests a preference for racking up safe fees simply for holding capital, rather than accepting the accountability of only getting paid when they outperform.

We’re not blind to the other side of the coin. There are a number of reasons often put to us as to why this type of fee structure should not be used. In the below episode of Mythbusters, we hope to debunk any of those concerns, which we deem as invalid and provide counter arguments to any more legitimate concerns.

The reasons stated above lead many in the industry (across both fund managers and investment advisers) to retain a strong preference for a tiered flat-fee structure. Whilst we respect those colleagues immensely and appreciate that under specific circumstances flat fees may be preferable, we clearly disagree with them on the whole.

To summarise, at Bellmont we are very keen to reward outperformance but just as keen to avoid paying high fees when they are simply not warranted, especially when the outperformance is not true Jensen’s alpha. Please refer to our previous article “How to Avoid Overpriced and Underperforming Managers” which also includes a summary of how we calculate the appropriate level of ‘alpha capture’ that managers should be retaining.

After all, why should investors pay for managers’ houses, yachts and lunches regardless of their performance, and then additionally cough up a performance fee on top of that. If a manager truly believes they can deliver 4 per cent alpha, they should be the first to ask for a performance-fee structure. Anything less is a guaranteed salary with minimal accountability.

Why don’t we work to better align investor interests, allocate to great active managers and keep everyone happy?

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