Investor Education > Investment Basics > Investment Fees
MANAGED FUND FEES
The Truth about Fees
Small differences in fees and costs can have a substantial impact on your long term returns, so before investing it is important to be aware of the fees that may be charged on managed investments. The following are some of the common fees that may apply to investments in managed funds, superannuation funds and pension funds.
Entry fee
When investing through an investment adviser, you will be charged an entry fee depending on the funds you invest in. Typically entry fees range from 4% to 5% of the initial investment and every subsequent investment including any regular investment plans.
This entry fee is normally paid to your financial adviser, and where you invest in a fund with no financial adviser the entry fee is retained by the fund manager.
Entry fees can have a large influence on the returns. Investing $50.000 and paying a 4% entry fee will mean $48.000 is actually invested. The table below shows a comparison of the effect of entry fees
|
$50,000 INITIAL INVESTMENT |
|
|
4% entry fee |
No entry fee |
|
Amount invested |
$48,000 |
$50,000 |
|
Value of investment after 10 years* |
$136,292.21 |
$141,971.05 |
|
Difference |
$5,678.84 |
*assumes average returns of 11% per annum
The initial $2,000 entry fee means a difference of $5,678.84, or 11% of the initial investment, on the final return of your investment. In other words, the entry fee in this case has cost the investor one year of investment time to make up the entry fee.
Entry fees are optional
You can avoid entry fees with 2020 DIRECTINVEST. By investing with 2020 DIRECTINVEST as your broker on new and existing investments, we will rebate 100% of your entry fee.
Nil entry fee funds
Nil entry fee funds are an alternative some fund managers offer investors. Typically these funds tend to charge a higher annual management fee or MER. You can avoid this by investing in the entry fee option via 2020 DIRECTINVEST to avoid paying entry fees and pay a lower MER.
Exit fee
Exit fees are not charged by all funds, but some fund managers will apply a one-off charge when you withdraw money from the fund. An exit fee may be a percentage of the money withdrawn but it can also be a flat fee. An exit fee can be quite inconvenient. Always check a fund for a possible exit fee.
Transaction costs
Transaction costs are the difference between the buy price and sell price of a unit and are often referred to as the ‘buy-sell spread’. For example, the ‘buy price’ for a unit normally exceeds the ‘sell price’ on the same day, which means that selling and buying units on the same day, would result in losing a fraction of the invested money as part of the transaction. This price differential is used to cover the costs associated with buying and selling assets at the investor’s request.
Switching fee
In some cases when switching from one investment type to another within the same company’s range of investments, a fund requires the payment of a switching fee. This is usually a small percentage of the sum of money to be transferred. The investor is often allowed to perform a number of switches per annum for free.
If a switching fee applies, it will be stated in the Product Disclosure Statement (PDS).
Management expense ratio (MER)
This fee is an ongoing fee that typically incorporates all of the expenses incurred in the professional management of the fund, such as trustee, legal, tax consulting and audit fees. The MER can be up to 3% of the total value of your investment in the fund. Typically the MER of a retail managed fund ranges between 1.5% and 2.5%, but this may be higher for funds that require more active management such as geared funds and hedge funds.
The suggested MER formula is:
|
Fees + Recovered Expenses x 100 Average Fund Size
|
The calculated MER of a master trust or a fund of funds should include the cost of the underlying managers’ fees and expenses but unfortunately this is not always the case.
If you were to make an investment of $5,000 per annum until the age of 65, the fees you pay will significantly affect the return on your investment. The table below shows the effects a 4% entry fee versus no entry fee and a return of 9.5% p.a. with 1.5% MER and 8.0% p.a. return with 3.0% MER if you started investing at age 25, 35 and 45.
|
THE EFFECTS OF FEES ON YOUR INVESTMENT |
|
Age |
No entry fees + 1.5% pa MER |
4% entry fee + 3.0% pa MER |
Difference |
|
25 |
$2,116,197 |
$1,337,765 |
$778,432 |
|
35 |
$819,539 |
$587,261 |
$232,278 |
|
45 |
$296,319 |
$237,230 |
$59,089 |
Performance fee
Some managed funds will charge a performance fee while most funds will not. A performance fee is best described as a reward for performing above the fund’s stated benchmark. There is no standard percentage for a performance fee because they are separately calculated for each fund manager. Typically the performance fee ranges between 20% and 25% of the value above the benchmark. If a fund has a performance fee, it is stated in the PDS.
Adviser service fee
If you are investing via a financial adviser, they will often mark up the fees on your investment with an ongoing adviser service fee. This is typically 1%-2% p.a. that is deducted from your investment and lasts for the life of your investment. An adviser service fee is paid over and above the fees payable to the fund manager and other charges your may pay your adviser.
Avoiding unnecessary fees
What’s important to know is that some investment fees are optional. Whilst you can’t avoid the fees paid to fund managers for the professional management of your money, you can avoid the exorbitant entry and adviser service fees that are paid to your adviser or are retained by the fund manager.
2020 DIRECTINVEST will rebate 100% on entry fees to virtually any managed fund, super and pension fund in Australia and we do not charge adviser service fees. We believe that you should seek professional fee for service advice if you need it and execute your own investment decisions to save.
>> Ready to invest? Invest in
managed funds with no entry fees via 2020 DIRECTINVEST