Modelling shows 56% of a portfolio can be wiped in fees

By Eliot Hastie

October 16 2018
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New research has shone a spotlight on the compound effect high fees and costs can have on a nest egg over standard investment horizons.

Research from digital wealth provider InvestSMART has found that over a 30-year time frame an investor paying 3 per cent in ongoing fees could lose up to 56 per cent of their portfolio.

The data modelling in How fees can destroy your wealth, found that an investment of $100,000 in Australia shares over 30 years to June 2018 would net $1,207,807 with a fee of 0.5 per cent, while a 1.5 per cent fee would net 26 per cent less.

The paper found 78 per cent of active funds underperformed industry standard benchmarks over 10 years with an average fee for achieving the underperformance of 1.74 per cent.

The 22 per cent of active managers that did beat their benchmarks tended to have lower fees, the research found.

InvestSMART chief executive Ron Hodge said most funds would not outperform the benchmark, which meant fees would make the biggest difference in a portfolio.

“The impact for investors is huge. The money is lost to fees, and the corresponding loss of the benefits of compounding ends up in the pockets of the middlemen and women of finance,” he said.

Mr Hodge said the high costs of investing was caused by fee stacking, which in many cases equalled 2 per cent per annum.

“We want to help investors to understand the depth and the extent of the fees they are paying and the impact it has on their savings over time, because a small number can make a big difference,” he said.

Mr Hodge said that InvestSMART offered a range of options for investors, including low fee options that he said would outperform the competition.

“We will underperform our benchmark, we know that, but we will outperform our peers to the differential in fees. Over the long term, that makes a big difference,” he said.

InvestSMART has launched a portfolio manager tool that rated the health of a portfolio to alert to danger as well as a Compare Your Fund tool, which lets people find out if they are paying too much.

“As technology continues to level the playing field for investors, we believe there is no reason anyone in this day and age should be paying excessive fees,” Mr Hodge said.

“That is why InvestSMART is currently investing heavily in a range of technology-based products to help investors lower the cost of investing.”

InvestSMART research offered some simple ways to make an investment go further, like consolidating super accounts, getting a fee breakdown and swap high fee products for low fee alternatives.

“Too many investors are seduced into thinking they can beat market returns by beating higher fees when in fact they underperform the index by the extent of those fees,” said the research.

“An average investor’s nest egg will grow more quickly if they concentrate on reducing the fees they pay.”

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Retirement