Jeffrey Dunham was one of the featured speakers at the Tiburon CEO Summit XIV, held in New York on April 10-11, 2008.

“At the end of the day, clients do not hire and fire advisors based on fees.  It is about whether they trust you,” says Jeffrey Dunham, Founder and CEO of Dunham & Associates Investment Counsel, (DAIC), a San Diego-based Registered Investment Advisor. 

Dunham’s firm occupies a unique niche in the advisory business.  They offer a series of funds with fees pegged to performance, and allow investment advisors to base their own fees on performance.

“If the fee is fair, clients have no problem with it,” says Dunham.  Performance-based fees embrace Dunham’s concept of fairness, because the manager’s, advisor’s and investor’s incentives are all perfectly aligned.  “Fairness engenders trust, and trust is how advisors should compete,” says Dunham, adding “Once clients trust you, they become evangelists - on the golf course, at cocktail parties, and elsewhere.”

Background and History

Dunham conceived of performance-based fees in the early 1980s, and initially approached several established leaders in the industry, who uniformly questioned his business plan.  One former boss told him performance-based fees were “noble but stupid.”  He persevered, establishing an RIA in 1985 and forming a trust company in 1999.  After initially offering private funds, he converted to public mutual funds, and became one of the first to offer performance-based fees for advisors.

“My goal was simply to find a way to differentiate myself,” says Dunham. 

Dunham identifies an industry trend where managers’ fees have eroded from approximately 100 to 30 basis points for many products.  Efficiencies and competition in custodial services, account administration, compliance, and other back-office functions have accelerated this trend.  Dunham sees performance-based fees as a way for truly skillful managers to earn a fair fee for the value they add, stemming the tide of fee erosion.

Fulcrum Fees for the Dunham Funds

DAIC offers a series of 10 sub-advised public mutual funds, representing unique asset classes and sub-classes, each utilizing a performance-based fee structure called fulcrum fees.  Five of these sub-advisers do not offer public mutual funds.

As an example of the fulcrum fee arrangement, the sub-adviser of the Dunham Small Cap Growth Fund receives a base fee of 50 basis points.  If the sub-adviser hits its benchmark, it earns 50 basis points.  In addition, if performance is within 20 basis points of the benchmark (termed the “null zone”) the sub-adviser still earns just the 50 basis points.  Performance over or under this band (either exceeding the benchmark by more the 20 basis points, or underperforming the benchmark by more than 20 basis points) is rewarded or penalized.  For over-performance, the sub-adviser can earn a maximum fee of 100 basis points (50 basis points of base fees plus 50 basis points of incentive fees), which occurs if performance exceeds the benchmark by 200 or more basis points.  For under-performance, the sub-adviser will receive no fees if the fund trails its benchmark by 200 or more basis points.

Fulcrum fees are perfectly symmetrical – incentives for over-performance mirror the penalties for underperformance.

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