Fees erode the value in super investments
HUMANS love to save money. Yet when it comes to investing, we often pay high fees in the belief 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 per cent sounds small but it can carry a big punch.
Over the past 30 years for instance, Aussie shares have delivered returns averaging 9.2 per cent annually. If you had invested $100,000 at the start of that period in a managed fund (like your super) with an annual fee of 1.5 per cent, 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 0.5 per cent, your investment would be worth $1,207, 807. That is 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 per cent in ongoing fees can sacrifice almost half (45 per cent) 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 reduce costs to zero, more so because investors can face a range of hidden costs such as advice fees, implementation fees and platform fees, as well as product fees. They all add up.
Over the past three years, funds that underperformed the market charged average annual fees of 1.71 per cent. By contrast, funds that outperformed charged fees averaging 1.43 per cent.
It goes to show 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. 1. Fold multiple super accounts into one 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. 2. Know what you pay
If you use an adviser, ask them for a fee breakdown. Add in the direct fees paid on investments, such as super. It is a fair bet you are paying more than you realise. 3. Check if product fees are worth it
If you invest only in index funds, which aim to mirror market returns, you really should not be paying much at all. Even if you go for something a little more fancy, aim for annual fees below 1 per cent — it can be done. Paul Clitheroe is chairman of InvestSMART, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.