Why is a fee cap often implemented?

Implementing a fee cap serves as a mechanism to manage the level of risk taken by investment managers. When there is a cap on fees, it can help align the interests of the investment managers with that of the clients, reducing the incentive to chase excessively high returns by taking on disproportionate or risky investments. When managers are restricted in how much they can charge, they may be encouraged to adopt a more prudent investment strategy that seeks to achieve reasonable returns without excessive risk-taking. This creates a balance between the pursuit of performance and the necessity of managing risk, which is essential for sustaining long-term investment success.

A fee cap does not primarily incentivize clients to invest more, increase total fees collected, or standardize fees across all firms, which highlights the specific function of a fee cap in mitigating risk-oriented behaviors rather than focusing solely on fee generation or standardization.