Investment Fund Fees Cause Financial Pain as Confusion Reigns
Written by Anthony Keane, InvestSMARTs Managing Director Ron Hodge discusses how confusion is playing into super fund managers' hands as fees hit investor returns. The following article appeared in The Daily Telegraph on Monday, 24 September 2018.
MORE than three-quarters of Australia’s superannuation and investment funds are performing worse than they should be despite charging hefty fees to manage people’s money.
New research spanning more than 5000 funds has highlighted how many use investor confusion to keep their fees up.
The InvestSMART study found that in the past three years, fees had averaged 1.67 per cent and 80 per cent of the funds underperformed their benchmark – such as a local or global sharemarket index – by an average 2 per cent.
“This means in many instances consumers are paying fees for no performance,” it says.
So for every $100,000 sitting in a super or investment portfolio, people are paying an average $1670 in fees annually, including an extra bite from underperformance that is costing them $330 a year.
InvestSMART managing director Ron Hodge said the funds management industry had “spent decades trying to confuse investors for our own benefit”.
“Try and ask an average person what a basis point is. Then there’s management fees,
investment fees, administration fees, platform fees, adviser fees, performance fees, entry and exit fees, transaction fees and brokerage,” he said.
“Nobody is going to understand.” InvestSMART has introduced a new free comparison tool that examines fees and performance across more than 5000 investment funds, super funds and pension funds.
Mr Hodge said people who regularly had money deposited into their super and investments found it difficult to work out if their increasing balance was caused by performance or simply their own money going in.
“The most important thing is they have to be in control to know how their fund is performing and whether they are on track to reach their financial goals. Otherwise they’re just swimming in the dark.”
High fund fees have been around for decades, and are a big reason for the strong growth of low-cost index funds and exchange traded funds in recent years.
BetaShares chief economist David Bassanese said the rise of ETFs had helped lower fund fees, but they were not falling sharply.
“Know what fee you are paying,” he said. “In this day and age, if it’s above 1 per cent, questions need to be asked.”
InvestSMART’s research found that average fees had dropped slightly – from 1.74 per cent over 10 years to 1.67 per cent over three years, but the underperformance was getting worse.
Mr Bassanese said this could be explained by many active fund managers being value managers who invested in undervalued companies – not a good move in recent times.
“A theme in recent years has been that growth companies – for example hi-tech stocks — with high valuations and high growth potential have been outperforming strongly, and value managers have struggled in this market,” he said.
Frequently Asked Questions about this Article…
Investment fund fees are causing financial pain because they are often high, averaging 1.67% annually, and many funds underperform their benchmarks. This means investors are paying significant fees without seeing corresponding performance benefits.
Investment fund fees can significantly impact your returns by reducing the overall growth of your portfolio. For example, on a $100,000 investment, you might pay $1,670 in fees annually, which can eat into your returns, especially if the fund underperforms.
You should be aware of various fees, including management fees, investment fees, administration fees, platform fees, adviser fees, performance fees, entry and exit fees, transaction fees, and brokerage. These can add up and affect your investment returns.
To determine if your investment fund is performing well, you can use tools like InvestSMART's free comparison tool, which examines fees and performance across thousands of funds. It's important to know if your fund is meeting benchmarks and helping you reach your financial goals.
ETFs, or exchange-traded funds, have played a role in reducing investment fund fees by offering low-cost alternatives to traditional funds. They have contributed to the growth of low-cost index funds, although overall fee reductions have been modest.
Some investment funds underperform their benchmarks because they may follow strategies that don't align with current market trends. For instance, value managers investing in undervalued companies have struggled recently as growth companies have outperformed.
To take control of your investment fund's performance, it's crucial to understand the fees you're paying and how your fund is performing relative to benchmarks. Regularly reviewing your fund's performance and using comparison tools can help ensure you're on track to meet your financial goals.
If your investment fund fees are above 1%, it's important to ask questions and evaluate whether the fees are justified by the fund's performance. Consider exploring lower-cost options like index funds or ETFs if your current fund isn't delivering value.
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