Dunham is not unique in its use of fulcrum fees, but is unique in that it is the only fund company that uses fulcrum fees exclusively.  Fidelity, Vanguard, USAA RiverSource and Janus also offer funds with fulcrum fees, but their fees are typically based on 3-year trailing returns.  Dunham’s Chief Sales & marketing Officer, Sal Capizzi, believes Dunham’s 12-month structure incents sub-advisers to deliver more consistent returns over time.

As with any sub-advised fund, there is an additional fee of up to 65 basis points which is charged by Dunham.  This fee is based on asset class.

Capizzi explains that many advisors are initially put off by the counter-intuitive nature of Dunham’s fee structure.  “When our performance is strong, our fees go up,” says Capizzi.  For advisors scanning for funds based on expense ratios, Dunham’s funds may be filtered out, especially when performance is good.  “But once we educate advisors about our approach, this ceases to be a problem,” according to Capizzi.

“Our belief is that you get paid for performance and not for attendance,” says Capizzi.  “That is part of the culture that Jeffrey Dunham has created here, and it extends throughout our organization, including our internal compensation systems.”

Dunham’s public funds are only three years old, and Capizzi says that between 60% and 70% of them are outperforming their benchmarks.  Perhaps because of the relative newness of performance-based fees, we are not aware of academic studies analyzing their performance.

Performance-based Fees for Advisors

Dunham’s true distinction is the performance-based fee structure they offer for advisors. 

Advisors utilizing Dunham’s funds can have their client fees set to 10% of absolute returns for each client’s portfolio.  For example, if a client’s portfolio earns $10,000 in a given quarter, the fee charged to the client will be $1,000.  If the portfolio breaks-even or loses money, the client will not be charged a fee. 

These performance-based fees are modeled after hedge-fund fees, but they do not contain the fixed fee component.  The typical hedge fund fee is “2 and 20,” but Dunham’s structure is “0 and 10.”  As with hedge funds, performance-based fees incorporate a high water mark.  If a portfolio incurs losses, no fees are due until the portfolio value reaches its previous highest value.

Advisors utilizing performance-based fees must ensure clients meet the compliance guidelines of qualified investors, as is the case with hedge fund clients.

Dunham is one of the only firms offering performance-based fees for advisors utilizing underlying public mutual funds.

Approximately 285 advisory firms offer the Dunham funds, and two-thirds use Dunham’s performance-based fee structure for advisors.  Capizzi finds larger advisory firms make greater use of performance-based fees, and is seeing an uptick in usage in the current bear market.  “Ultra-wealthy clients are going through an especially painful experience today, paying big fees on portfolios that are losing large amounts of money,” says Capizzi.  “These clients are switching to advisors that offer performance-based fees.”

“Most clients do not care about performance versus a benchmark.  They care about the bottom line – whether they can fund retirement, college education, and the like,” says Dunham.  “This is why performance-based fees have caught on with advisors – particularly those with ultra-wealthy clients - and why these advisors are building a greater level of trust with their clients.”

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