Paul's Insights: Small fees. Big impact
Human beings love to save money. Yet when it comes to investing, we often pay high fees in the belief that this will lead to higher returns. Over time though, fees can have a devastating impact on our wealth.
An annual investment fee of 1.5% sounds small but it can carry a big punch.
Over the last 30 years for instance, Aussie shares have delivered returns averaging 9.2% annually. If you’d invested $100,000 at the start of that period in a managed fund (like your super) with an annual fee of 1.5%, you’d now have $896,508.
It sounds impressive, right?
However, if you had invested that same $100,000 in a fund with annual fees of just 0.5%, your investment would be worth $1,207, 807. That’s an extra $311,000 going straight into your pocket just because of lower fees.
The impact of high fees is backed up by research from InvestSMART.
It found that over 30 years, investors paying 2% in ongoing fees can sacrifice almost half (45%) of what their portfolio would have been worth had they paid no fees at all.
Of course, zero fees are a tad unrealistic. Even the best of us struggle to get costs down to zero, more so because investors can face a range of hidden costs like advice fees, implementation fees, and platform fees as well as product fees. They all add up.
It’s easy to be seduced into thinking that you can beat market returns by paying higher fees. But consistently outperforming the market is very difficult – and it’s not necessarily related to the fees you pay.
Over the last three years, funds that underperformed the market charged average annual fees of 1.71%. By contrast, funds that outperformed, charged fees averaging 1.43%.
It goes to show that it makes better sense to forget about outperformance and concentrate on what you can control – paying the lowest total percentage fee possible.
There are three easy ways to do this.
- Fold multiple super accounts into a single account
Most super funds charge a fixed annual administration fee, so having more than one fund means doubling up on this fee. Consolidate your accounts and get all your money working for you in one place.
- Know what you’re paying
If you use an adviser, ask them for a fee breakdown. Add in the direct fees paid on investments like super. It’s a fair bet you’re paying more than you realise.
- Check if product fees are worth it
If you invest only in index funds, which aim to mirror market returns, you really shouldn’t be paying much at all. Even if you go for something a little more fancy, aim for annual fees below 1% – it can be done.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.