Why hidden fees are swallowing your investments

Written by Kylie Purcell, this article discussed InvestSMART's White Paper "How Fees Can Destroy Your Wealth". The following article appeared in Your Money on October 16, 2018.

High fees to financial advisers, fund managers and technology providers are wiping out much of what many Australians think they’re earning from their investments, says digital wealth platform InvestSmart.

New research from the firm showed that paying just one per cent more in fees can slash your investment earnings by up to 26 per cent over 30 years.

Take that number to three per cent, and a portfolio loses more than half of what it would have been worth had there been no fees.

While the fees charged by professionals and administrators can appear minor on their own, they can easily stack up to two per cent, InvestSmart’s CEO Ron Hodge said in a statement accompanying the research’s release.

“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.

The report found that the cost of fees made the biggest impact on what you earn, rather than returns.

Since it also concluded that 78 per cent of active funds underperform over a ten year period, that puts fees in a pretty key position.

No surprise then that over the long-term, the lowest-cost funds were shown to outperform the most expensive.

InvestSmart Chairman and Financial Literacy Board Chair Paul Clitheroe today called the report “very challenging subject matter.”

“Underlying fees are going to be part of the next big debate,” Clitheroe said.

Part of the problem is that for investment advice to be worth it, you need to have a decent sum to invest in the first place, according to Clitheroe. And advisers aren’t using the “no” word enough.

“Someone says to you, ‘I’m earning $40,000 a year with ten grand to invest,’ you’ve got to say to them, we’re really sorry, we cannot help you.”

“Because if it will cost about $3,000 to prepare a statement of advice…. you need to say, we just cannot charge you what we need to charge.”

Clitheroe – who co-founded financial planning firm ipac (now part of AMP) – said to really get the benefit of financial advice, you’d want to be investing at least around $500,000.

No easy feat for the everyday Australian.

He also cautioned against going with a fund manager that overstates what they can actually bring in, or “paying for a Mercedes,” when what you’ll get is a “Toyota.”

The paper recommended doing your research on financial products, consolidating your superannuation and swapping out high fee products for low fee alternatives.