Dunham Gives Fund Managers Tough Love

Dunham also offers registered investment advisers and independent brokers who sell its funds a choice of how to get paid. They can either receive a flat distribution fee or a performance-based fee. The flat fee would be from 0% to 2% on an annual basis, or sellers could get 5% of the profits on the account paid quarterly.

Like the fulcrum management fees, the performance-based distribution fees align investment advisers compensation with that of clients, since both get paid for results.

The idea of performance fees isn't revolutionary, but it is largely confined to hedge funds and other products aimed at large investors. Dunham & Associates has been working with this structure for institutional clients since its founding in 1985. It launched 10 funds for retail customers in December 2004. These remain the only funds that can potentially pay a subadviser nothing. The San Diego firm says it is also the only firm allowed by the Securities and Exchange Commission to hire and fire money managers on a performance basis without a shareholder proxy.

Still, Lipper says six other fund companies run funds with some level of pay for performance, including Fidelity and Vanguard. Lipper tracks 223 different funds with performance-based fee structures, and they are split into 654 different share classes. Fidelity, which started this practice in the 1970s, has the most with 64 different funds. These include (FCNTX Quote - Cramer on FCNTX - Stock Picks)Contrafund (FCNTX), (FMAGX Quote - Cramer on FMAGX - Stock Picks)Magellan (FMAGX), which reopened to new investors last week, and (FDGRX Quote - Cramer on FDGRX - Stock Picks)Growth Company (FDGRX).

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