Invest
Are hidden fees eating away at your returns?
Despite advances in technology bringing down the cost of investing, many investors are still being slugged with excessive fees.
Are hidden fees eating away at your returns?
Despite advances in technology bringing down the cost of investing, many investors are still being slugged with excessive fees.
Investing can be an expensive business. The sad fact is many investors are paying for outperformance and are getting the opposite. Everyone wants a comfortable, padded seat on the gravy train, from brokers and advisers to fund managers and administrators. It all adds up and it is you, the investor, who is paying the price.
Previous data has found in most cases, it is fees rather than performance that makes the biggest difference to your investment balances in later years.
In fact, paying an additional fee of just 1% can mean the difference between being able to afford an annual holiday, a decent car, and the odd bottle of Shiraz in retirement, to just barely scraping by.
Research has found that for an investor with an initial investment of $100,000, paying 1% per year extra in fees would reduce their returns by $361,164 or 25.85% over 30 years. Increase the fee to 2% and the investor would miss out on $629,466 - almost half their potential return of $1.4 million.
The message is simple: fees matter far more than most people think. So, how can investors get a clearer picture of where their hard-earned cash is going?
Here are just some of the fees and costs to look out for.
The cost of financial advice
If you are among the one in five Australians who has a financial adviser, you will either pay a flat fee for a Statement of Advice (SOA) or a percentage of your total portfolio (generally 1-2%) in fees.
This latter method is usually best avoided, as on a 6% return, you could effectively be giving up a third of your portfolio’s performance every year.
Unless you need a full, holistic financial plan done every year, which most people don’t, you might want to consider some of the lower-cost options available on the market.
Asking your financial adviser to charge a flat fee or using a digital wealth service may be much better for you over the long term.
Platform fees
Platforms can be useful for simplifying the process of tax and reporting, but they also contain a raft of hidden fees that can really impact your investment returns. This includes administration fees of between 0.3 and 0.6%, fees taken on behalf of the adviser, and lucrative fees on cash balances.
While there are now several independently-owned platforms in Australia, many advisers still use the ones owned by the big four banks, which are not only expensive but favour bank-owned products.
Avoiding platform fees can mean taking on more work yourself, for example by using your broking platform to buy, sell, and track shares and exchange traded funds (ETFs).
Product issuer fees
If you invest in any type of fund – whether that is a managed, superannuation or pension fund, or an ETF, you will also be paying fees to the product issuer. For some funds, these can really stack up, incorporating entry and exit fees, transaction costs, switching fees, performance fees, and a management expense ratio (MER).
With product costs coming down across the board, there is no reason to be giving away a large chunk of your investment returns to product managers.
If you are heading down the passive route, simply look for the ETF with the lowest fee and if you prefer an active fund, ensure it has the performance track record to justify the fees charged.
Admin and other fees
If you operate a Self-Managed Super Fund (SMSF), you will also have to pay accounting, audit, and administration costs, which can add up to around $2,000 per year.
Unfortunately, high administration fees are a necessary evil for SMSF trustees. However, focusing on the first three ways to slash the fees you pay should still help you to reduce the effect of high fees on your portfolio over the long-term.
Ron Hodge is CEO at InvestSMART
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
What to expect as the end of lockdown looms? Will the Stage 2 tax cuts boost your tax return? Where should investors be looking as the economy reopens?
Listen now
Could property prices inflate by another 20%? What’s happening in recent dividend announcements? Did your fund fail the YFYS test?
Listen now
What does the NSW regional permit mean for property investors? Who really wins from the BHP-Woodside merger?
Listen now
The sea and tree-change norm; Square’s acquisition of Afterpay; Why you should think twice before turning to TikTok for advice
Listen now
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
