Pay-for-performance (Investment)
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A pay-for-performance fee structure, in relation to the investment industry, describes a management fee that is paid to a financial adviser or investment manager when their performance returns exceed those of their designated benchmark. The performance fee is generally calculated as a percentage of the investment outperformance gained. The rationale for a pay-for-performance fee is that it provides a low-cost base solution for investors and aligns their interests with investment managers who only get compensated for outstanding performance.[1]
Typically, investors pay a base fee for investment management services and performance fees are paid dependent upon the investments’ performance over a given period in relation to the industry benchmark used.[2] With increasing attention on the cost of fees for investment services, the onset of alternative investment firms including performance-based investment management firms are increasingly on the rise. One Canadian pay-for-performance firm is structured to only receive a profit when their clients’ investments outperform the industry benchmark.[3]