Understanding Fees

David French | 18/02/2009 12:57:45 PM

This article was originally published as 'Investment fees can be costly' in The Morning Bulletin in August 2001

Doctors, solicitors and accountants all charge fees and so do financial planners. However, don’t ask a financial planner, “What are your fees?” instead ask, “how much will it cost to set-up and manage my investments?” Just as for a home loan, you need to look at the overall cost. Within any profession quality varies, so you need to look at what you’re getting for your money.

What are the financial planning fee components that you need to look at?

Plan fee. There might be a fee for writing the plan. Find out whether the plan is genuinely tailored for you. Did your advisor write the plan or was the job palmed off to a junior? Does the plan include a range of investments, or does it only make use of managed funds?
Up-front commissions. Are up front commissions charged? These are often 3 to 4 per cent of the invested amount. Commissions are actually paid by you – they are simply passed back to the advisor by the fund. Ask what you get for the commission? Does paying a once-off commission guarantee an ongoing interest in your financial affairs?
Implementation fees. The advisor might charge a fee to implement the portfolio. Does this fee cover the planner’s time and effort, any fund entry fees and brokerage on any direct investments?
Switching fees. Switching fees are essentially a commission charged any time you make a new investment. Did the advisor do any extra work for this? Could it give incentive for the advisor to make regular alterations to your investments for no good reason?
Management expense ratio (MER). If you invest in a managed fund, the fund charges you. What is the MER for the recommended fund? The MER could be as high as 2 per cent, or as low as 0.5 per cent. MER’s for retail funds often include trailing commissions paid to the advisor.
Ongoing advisor fees. These fees are charged for looking after your portfolio on a long-term basis. Ask whether there are any other administrative fees, and whether paying the ongoing advice fee gives you access to other services (such as switching or regular contributions) for free.
Exit fees. Some funds charge no entry fee but charge an exit fee. This can be quite high.
No entry or exit fees. If you invest in a fund with no entry or exit fees, you will probably be paying a much higher MER while you hold the investment.

Real estate

Investments in real estate have associated costs and as with other investments the quality of advice varies markedly.

Entry fee. The stamp duty on a $100,000 investment property is approximately 2.3 per cent and mortgages attract stamp duty too. Think of this as an entry fee.
Exit fee. When you sell a property the agent will charge commission of around 2.5 per cent. This is essentially an exit fee.
Ongoing costs. The tax department allows a depreciation rate of 2.5 per cent of the capital cost on more recently constructed buildings. This is essentially a proxy for the maintenance costs involved in owning a building and can be compared with the MER of a managed fund. One of the better agents in town charges 8.5 per cent of income to manage an investment property for you.

GST

Whether you have decided to invest in stocks, managed funds or property, in all cases you should ask whether GST is included in the fees discussed above.

Do It Yourself

One way to reduce fees is to do the work yourself. When it comes down to it, whether or not you save money depends on how much you know. For instance, many people have bought stocks using an on-line broker only to find that they paid a price way above the market rate. Why? Because the on-line broker simply executed “at market”, and the investor was ranked above many other investors doing the same thing. The effect is to inadvertently “ramp-up” the share price ahead of purchasing the stock. It is not an exaggeration to say that you could save 1 per cent on brokerage and lose 20 per cent on the trade.

Most importantly - you need to understand the types of investment you are getting into. Can you do this without quality advice?

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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