Down the rabbit hole with capped fee investing

What if you could invest in a diversified portfolio of ETFs and pay no more than $451 a year, regardless of the amount? Well, now you can.

As you drive up the M1, crossing the border from northern New South Wales into Queensland, a sign announces the fine for bringing a rabbit with you: $36,000. That's per rabbit.

There are about 400 million bunnies in Australia. One can presume a good many of them failed to heed the warning and crossed over anyway. You'd think one or two more smuggled in by car wouldn't make a difference.

And yet the size and clarity of the number has the desired impact. Everyone that sees it suffers a kind of cottontail sticker shock. This is price communication at its most elemental; nothing hidden, nothing unclear and no excuses.

Key Points

  • When investing in ETFs and index funds percentage fees hide true cost

  • Such fees benefit the industry at the expense of the investor

  • InvestSMART ETF-based Portfolios now available on a capped fee basis

Price tags are a wonderful invention, even when applied to fines. Removing the need to haggle, they express in the simplest terms how much something costs. Which is maybe why real estate agents and the finance profession tend not to use them.

Percentage fees, by comparison, often hide a high dollar value behind a small-sounding number.

Which sounds better? Pay an agent 1.5% to sell your $2 million dollar home, or $30,000? Pay an advisor 2% a year to manage your $500,000 portfolio or an annual fee of $10,000.

Even people that are good with numbers can be hoodwinked like this, and those that aren't have no chance. Australia performs below average on international numeracy scores, and this industry preys on that ignorance.

Percentage fees offer another advantage. When they're based on the price of an asset, the dollar fee increases with the asset's price. There's no need for annual price increases with percentage fees because they're already built in. 

Readers who have tucked into our recent whitepaper, How Fees Can Destroy Your Wealth, will be aware of another impact the finance industry prefers to keep hidden.

Over a 30-year time frame, an annual fee of 3% entails an investor losing 59% of what their portfolio balance would have been had they paid no fees at all. Small number, big difference.

In the days of paper-based administration, chalkies and personal brokers, all working to help an investor beat rather than replicate an index, the case for percentage-based fees had more merit.

But with computerised trading, portfolio management and broking, combined with the shift to index investing and exchange traded funds, that argument has many holes.

The overall cost of investing is falling but the percentage fee model endures, even for basic index funds ­- simply because it's more lucrative.

InvestSMART's nascent funds management business is changing that. For the first time in Australia, we'll be putting a cap on investors' fees.

Fees for InvestSMART's capped fee range, constructed using exchange traded funds, will start at just $99 per annum for clients with lower balances.

For those with balances of $82,000 and over, though, fees will be capped at $451 per annum. This includes all administration costs but excludes indirect costs charged by the ETF providers and brokerage, which is the lowest in the industry at $5.50 or 0.11% of the value of the trade (whichever is greater).

Investment Amount Investment Fees
$10,000 - $18,000 $99 p.a capped
$18,001 - $81,999 0.55% p.a.
From $82,000 $451 p.a capped

A capped fee makes a huge difference. If you invest $1 million, InvestSMART's annual fee would be just $451. That's just 4.5 basis points or 0.045%. With fees like that, even Queensland rabbit fines might seem manageable.

Included in this fee are the following services:

- online account viewing;
-regular rebalancing of the portfolio by the InvestSMART investment team;
- annual tax statements; and
- regular performance reports.

 

Under InvestSMART's Professionally Managed Account (PMA) platform, you hold the securities in your name (HIN) and can make regular contributions and withdrawals with ease. And you can combine our model portfolios in any proportion you choose, creating a unique portfolio tailored to your investment objectives.

And the catch? Well, although it comes close, this isn't completely capped fee investing. While InvestSMART's fees are indeed capped, the indirect costs charged by the underlying ETF providers on a percentage basis are passed on to you, the investor, as are brokerage fees. These are pleasingly low but there is usually a percentage component.

There's also the fact that the capped fee arrangement only applies to InvestSMART's ETF Portfolios range. Simply look out for the blue 'Capped Fees' label. Fees for Intelligent Investor Equity Income and Equity Growth portfolios, and InvestSMART Hybrid Income, remain at 0.97% and 0.92% a year respectively. As actively managed portfolios, these are more costly to operate and entail buying individual stocks.

But for investors that want a simple portfolio of ETFs with a focus on income, growth, fixed interest or international property & equities - or more likely a mix of all of them - we should be able to meet your needs. And your fees to us will be capped at $451 per year.

Check it out here

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