Investment fees are one of the most important factors to consider when it comes to successful investing. Understanding exactly what they are and why they are being applied can help you to future-proof your wealth and ensure a more comfortable retirement.
High fees can be detrimental to your portfolio, especially if charges are not transparent. Fees should be reviewed every few years to ensure that they are as low as possible and the portfolio is being given the best chance to grow. This may sound obvious but when it comes to investing many people focus on the portfolio’s performance and not the fees.
However, the performance is for the most part out of their control and dictated by capital markets and global events. Fees, on the other hand, are one of the few aspects they have control over. They should be looked at in the same way we look at insurance premiums, energy providers or phone networks, which is typically with very little brand loyalty and a strong cost vs value mindset.
Where fees are taken from
One of the biggest issues in the financial services industry is that historically fees have been structured in a complicated way, especially in the offshore market. Hidden fees are not uncommon and often charges are undisclosed, with financial sales people even suggesting there are no fees when they are actually receiving large commissions.
In more recent years the industry has progressed to a point where there is marginally more transparency, due in part to more rigorous regulation but also due to competition between advisors. So, let’s look at where fees usually come from:
There are three main layers of fees to consider:
1 – Advice fees
This is the amount that the advisory company is charging for their services. Typically this is 1% per annum.
2 – Platform charges
Portfolios are held within a brokerage platform of some sort. These platforms often charge an ongoing fee that ranges from 0.3 – 1%. Some platforms do not charge anything and only charge dealing costs which are incurred when you buy or sell an asset in your portfolio. Typically platforms that charge ongoing fees will also charge for dealing.
3 – Investment fees
Investment fees are incurred on the portfolio itself. If you buy a fund it will have a charge that pays for the management of that fund. ETFs are the cheapest as they are passively managed and often algorithmic, whereas managed funds will be more expensive as they have a team of analysts and a fund manager, who need to be paid, making the decisions.
Investment fees are typically the easiest place for fees to go unnoticed as the returns on a fund are shown net of all fees, rather than as two separate line items.
Advisors can monetise your portfolio for their own gain at any three of these points which is what we refer to as opaque fees or hidden fees. Their advice fees are usually transparent and sound fair, the disclosure often comes at the platform level and in the investment fees.
A good way to see this is by looking at share classes on funds. For example if we look at a well known managed fund such as Fundsmith, they offer three different share classes, T class, R class and I class.
T class costs 1.04%, R class costs 1.54% and I class costs 0.94%. Fundamentally, these three fund variants are invested in the exact same things. The R class pays a trailing commission to an advisor. This information is clear on their website and it states on their prospectus that, ‘the R Class is designed for investors who use an intermediary who is paid trail commission’.
The issue is that this may never be noticed by you as a client since only a single letter after the fund name is the only clue you are paying your advisor commission. You are in a fund that is costing 0.6% more than the exact same fund, which you also have access to, and an advisor who tells you that their fees are simply 1% a year, is actually earning 1.6% from your portfolio.
No go products
A simple way to mitigate any risk of hidden fees is to just say no to certain products or portfolio arrangements. For the majority of investors, there are absolutely no real benefits to some of the most commonly used products on the market. Here are a few that should be considered major red flags if suggested by your advisor.
Structured notes are an easy way for advisors to earn large commissions with many structured notes paying over 5% to the advisor. In some exceptional cases these products may make sense for the investor, but due to the large commissions offered to the advisors selling them, they are mostly sold for the advisor’s advantage and not the client’s.
Portfolio or Life Bonds
These insurance wrapped investment platforms typically pay 7%+ in upfront commissions to the advisors that sell them. In most cases they offer no advantage over a low cost investment platform. When used correctly there may be a use case for certain investors, but again the large commissions encourage miss-selling.
Regular savings plans
Possibly the least cost effective way of investing into the markets. Typically they have very restricted and expensive funds available. Many of them only provide ‘mirror funds’ which are the providers own copy version of a more well known fund providers offering.
For example, Zurich offers funds such as the Blackrock Sustainable Energy fund in their Vista product. This is listed in their fund selection as ‘ZI Blackrock GF Sustainable Energy’. The ZI stands for Zurich International and what you are buying is their copy version of Blackrocks fund. This is important as you may think you have invested with Blackrock, but you haven’t, the fund is managed by Zurich and your money is with them, the fees are going to them and it is unlikely the performance will be identical. Life companies who offer direct funds will typically only offer the most expensive share class of those funds.
The charging structures on these products are incredibly complicated and expensive.
Reducing your fees
The good news is that the market is evolving and regulation is increasing. This means that more companies need to crack down on bad historical practices and approach the market with a more client centric attitude. Brite took the initiative and created a transparent model long before pressure was applied to the industry. This approach has helped us grow the business in a responsible way and helped thousands of clients reduce their fees significantly.
We offer a comprehensive review of your current arrangements and a side by side comparison between what you are currently being charged and what our low fee model offers. Speak to one of our advisors today to see how much you could save with Brite.