What 1% in fees could do to investments
Written by Kanika Sood, this article discussed InvestSMART's White Paper "How Fees Can Destroy Your Wealth". The following article appeared in the Financial Standard on October 19, 2018.
InvestSMART researchers found stark differences in the outcomes for investors paying different fees.
A person who paid 0.5% to invest $100,000 in Australian shares for 30 years ending June 2018 would have accrued $1,207,907.
However, if the fee were to be 1.5%, the person would have ended up with just $896,508 which is almost 26% less.
InvestSMART chief executive Ron Hodge said in most cases, fees rather than returns make the biggest difference to investors' quality of life in later years.
"People don't realise the magic of compound interest," Hodge said. "It works for you but it can also work against you [compounding of fees]," he said.
"What we found is that many investors are paying for outperformance and getting the opposite. Our research shows that on an average fund managers are underperforming by the amount of their fee."
Hodge is referring to InvestSMART research released last month that found eight in 10 managed funds in Australia failed to hit benchmark returns over a 10-year horizon.
The average underperformance was 1.88% while the average fees were 1.74%.
InvestSMART offers two options for investors. For a flat subscription fees, it gives people access to research to build their portfolios themselves.
The second option gives them access to model portfolios built and maintained by InvestSMART's team at a cost of 50bps.
The company runs an algorithm through Morningstar's universe of funds to build its model portfolios. The costs are restricted to 50bps by fine-tuning the expenses along the value chain, including
"The costs have come down significantly in the past years from 97 bps" Hodge said. "We can do it even cheaper."
Frequently Asked Questions about this Article…
Investment fees can significantly impact your long-term returns. For example, if you invest $100,000 in Australian shares for 30 years with a 0.5% fee, you could accrue $1,207,907. However, with a 1.5% fee, your returns would drop to $896,508, which is almost 26% less. This shows how crucial it is to be mindful of fees when investing.
Fees are often more important than returns because they can erode your investment gains over time. As InvestSMART's chief executive Ron Hodge points out, many investors pay for outperformance but end up with underperformance due to high fees. Understanding and minimizing fees can lead to a better quality of life in later years.
Compound interest can work both for and against you. While it can help grow your investments, it can also amplify the impact of fees over time. High fees can compound and significantly reduce your overall returns, making it essential to choose investments with lower fees.
According to InvestSMART research, eight in 10 managed funds in Australia fail to hit benchmark returns over a 10-year horizon. The average underperformance is 1.88%, while the average fees are 1.74%. This highlights the importance of carefully selecting funds and being aware of their fees.
InvestSMART offers two main options to help reduce fees. One is a flat subscription fee that provides access to research for building your own portfolio. The other is access to model portfolios built and maintained by InvestSMART's team at a cost of 50 basis points (bps). These options aim to minimize fees while providing valuable investment insights.
InvestSMART builds its model portfolios by running an algorithm through Morningstar's universe of funds. This process helps them fine-tune expenses along the value chain, keeping costs restricted to 50 basis points (bps). This approach allows them to offer cost-effective investment solutions.
Yes, investment costs have decreased in recent years. According to InvestSMART's chief executive Ron Hodge, costs have come down significantly from 97 basis points (bps) to 50 bps. This reduction is part of their effort to provide more affordable investment options.
The average fee for managed funds in Australia is around 1.74%. However, it's important to note that these fees can contribute to underperformance, as many funds fail to meet benchmark returns. Being aware of these fees and seeking lower-cost alternatives can improve your investment outcomes.
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