Fund managers were typically calculating fund performance after deducting performance fees, and in one case did not disclose the basis on which the fee was calculated. That meant investors were often left with opaque disclosure from their fund managers, said chief operating officer Jody Kaye.
"The New Zealand market is not operating at best practice. Performance fees are quite misunderstood."
The research comes as Morningstar prepares to review the performance fees of New Zealand fund managers, and after a Financial Markets Authority guidance note saying it had fielded a growing number of queries about the reasonableness of performance fees and structures.
While KiwiSaver funds are required by law to charge fees that are "not unreasonable", there is no legal definition of the term, and non-KiwiSaver fund managers have no such obligation.
However, the FMA has recently cracked down on the fees financial advisers receive through commissions after the Government introduced minimum education standards and a new licensing regime for the sector.
The five standards Harbour Asset has used relate to: an appropriate base fee and performance fee relative to the types of assets invested in; using a benchmark that tracks the same asset class as the investment; setting a performance hurdle and cap on the fee; setting a high-water mark that means the fund has to recoup any losses before it can achieve a bonus; and setting the crystallisation period for the bonus at a minimum of 12 months.
One fund surveyed by Harbour Asset was resetting its "high-water mark" every month, two did not disclose clearly how often their resets occurred, and the other three were on six-monthly resets.
The so-called high-water marks could, in some cases, operate almost as "low-water marks", said Kaye. Half the funds surveyed had crystallisation periods of less than 12 months. Three of the 12 were awarding themselves performance fees as long as their funds outperformed simple cash investment, a result Kaye described as "surprising".