What 1% in fees could do to investments

Advisers paying just 1% more for investments could erode their clients' nest eggs by 26% over 30 years, according to new data modelling from InvestSMART.
By · 22 Oct 2018
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22 Oct 2018 · 4 min read
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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."

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