We all know that fees eat into our savings and investments but how much of an impact do they really have? When we did the calculations, the difference in final amounts after fees ended up being hugely different.
Paying a few per cent per year may not sound like much, but it could easily end up making you poorer by $100,000.
Let’s say you invest $50,000 in a diversified portfolio and top-up $5,000 each year after that. If you were to invest in a traditional managed fund which costs 3% per year in total fees, you would end up with a balance of $292,995. On the other hand, if you invested in a low-cost option with 1% in total fees, you would end with a balance of $393,462 after 20 years*.
That’s a $100,000 difference from paying just 2% less in fees over 20 years.
* Assuming an investment return of 8% per year
Layers of fees
Traditional investment products generally include many layers of fees, which can easily add up to 3%.
When we looked at the product disclosure statement (PDS) for retail managed funds offered by the banks and wealth managers, calculating the total fees proved a challenge in itself.
Typical managed fund fees include:
- Management fees: Ranging from 0.3% to 2.8% per year depending on the fund. The more actively managed the fund and the more complex the investment strategy, the higher the fee.
- Performance based fees: An additional fee of up to 25% of any outperformance over the market return to reward fund managers when they do well. Unfortunately no fund manager reimburses investors when they do badly!
- Transaction costs: The buy/sell spread covers the transaction costs incurred when a fund has to buy or sell assets as a result of an investor making an investment into or withdrawing from the fund. The buy spread and sell spread can be up to 0.5%.
- Other costs: This can range from operational costs, administrative costs and recovery for costs incurred by the fund (e.g. when there are changes in government regulations), which can be up to another 0.5% per year.
- Financial advice fee: If you’re using a financial adviser to invest in the fund, there may be initial and/or ongoing commissions paid to the adviser, which can be up to 5%.
Platforms take another cut
If your financial adviser decides to invest into a fund via a master trust or WRAP platform, that can mean additional one-off fees and ongoing admin fees for using the platform.
Our Fat Cat Funds Report found that platform fees hugely impacted investment returns to investors. For example, an investor putting their money in the ‘Suncorp Fidelity Australian Equities Fund’ was charged a management fee 0.85%. The same investor putting their money in the equivalent fund with ANZ, the ‘OneAnswer Fidelity Australian Equities Fund’, would end up paying 2.85%. Same fund but different platform with an extra 2% in fees.
A simple, low fee structure
We believe that having many layers of fees is unnecessary and something investors shouldn’t have to put up with. The high fees charged by traditional investment products are also causing many Australians to leave their money in the bank and miss out on the benefits of owning shares and bonds.
This is one reason why Stockspot has a transparent fee structure and low fees. We don’t think people need to be paying high fees to get access to professional investment advice and have their portfolio managed for them. We’ve made our fees simple and clear so our clients can understand exactly what they’re paying, have full visibility over their investments online and be able to make changes to their portfolio whenever they want without being penalised with extra charges.
Low fee, hassle-free investing
Stockspot is Australia’s fastest growing automated investment service. We can help you build and manage a personalised portfolio tailored to your financial situation and your goals. With Stockspot, there’s no paperwork, no need to be an expert and no hassles.
Main image: Rafael J M Souza via Flickr
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