Performance fees force investors to pay twice Alan Miller, formerly of failed asset manager New Star, launched Spencer Churchill Miller (SCM) in 2009 to give investors a lower-cost option. When he started the company, he imposed a performance fee on his funds, but quickly found they were ineffective. We used to have a 5pc performance fee - much lower than most. But we found investors simply did not understand the fee structure - many asked if the cost was 5pc of their entire investment, so within a year we abolished the performance fee, and we didn't raise our annual charge either," he said. There is nearly £12bn invested in unit trusts that carry a performance fee, and £10bn in investment trusts that levy the extra charge. Mr Miller said these funds should do away with the performance fee altogether. "The end customer simply does not understand performance fees," he said. In some cases they may well be justified - CF Odey UK Absolute Return fund, for example, is top of the charts even with an extra fee - but people need to understand what they are paying in order to make an informed choice, and they don't. To help investors work out the true cost of their portfolio holdings, SCM has launched an investment charge calculator. Trueandfaircalculator.com works out the total annual cost - in pounds - for more than 7,000 funds, including initial charges, annual charges, dealing costs and performance fees. Volatile funds in particular offer poor value if they have a performance fee. Levied on the way up, when the fund crashes investors still pay the annual fee - and lose capital - meaning you end up paying for outperformance but getting poor performance. Depending on the chosen benchmark, some managers can get a performance fee for doing literally nothing. International Public Partnerships investment trust has come under fire recently for just that. The fund seeks to outperform the 15-year gilt index plus 2.5 percentage points. If bond yields continue to rise - as they have been doing since the beginning of the year - the index will fall, meaning even if the share price stays the same, the manager will be paid. To tackle the problem of volatile funds repeatedly paying out a performance fee just for gaining back previous losses, funds should have high "water marks." This means that if a fund does not reach a new high - beating recent outperformance, there should not be a performance fee imposed. Even if you understand the complex calculations involved with performance fees one of the key concerns is unpredictability. With a standard annual charge, fees are the same year-in, year-out. With performance fees you do not know whether next year will cost your portfolio hundreds or thousands of pounds. Brian Dennehy of fund analyst FundExpert.co.uk said that investors should focus less on charges and more on performance. For some years now the media and regulators have obsessed about charges. The reality is that they have been fighting yesterday's war," he said. What advisers, regulators and media should now concentrate on is improving investment outcomes for investors - be in no doubt there is huge scope for improvement. Ironically this will likely reduce charges for many investors as advisers will be less inclined to recommend high charging fund of funds or discretionary fund management services, which also tend towards mediocre performance. The difficulty with performance fees is that although the formula is disclosed upfront, its impact on a range of possible returns is difficult to understand. Performance fees can vary but the average unit trust with a performance fee charges 17pc, and the average investment trust charges 16.6pc. This is payable on top of standard annual charges. Famed Fidelity fund manager Anthony Bolton - who has recently announced his retirement as head of the company's China Special Situations investment trust - had a potential performance fee which was never triggered, thanks to the fund's disappointing performance. Had the fund outperformed its benchmark index by more than 2pc over a performance period, 15pc of this outperformance would have been sliced off the top for the fund manager. Investment trusts tend to carry smaller annual management charges than unit trusts - most unit trusts charge a standard 1.5pc annual fee, but the annual fees on investment trusts are closer to 0.6pc.