“If fees consume more than 1% of your assets annually, you should probably shop for another adviser.”
- The Intelligent Investor (1949) by Benjamin Graham, Warren Buffett's professor and mentor
TAKEAWAY OF THE WEEK
There are two supermarkets within a ten minute walk from my house, but I order my groceries on Redmart as it's slightly cheaper. I check Hotels.com and Expedia before booking any trips to find a good deal. It's so easy to compare prices for any purchases and save a few dollars, but it's shocking to realise that one of our largest expenses goes under the radar. Investors are surprisingly clueless on how much in fees they pay on investment products that over the long run could amount to hundreds of thousands of dollars. Can you think of any other products or services where you have no idea what they cost?
Time and time again, fees have been proven to be one of the key determinants of long-term returns. Fees can vary greatly between different mutual funds or unit trusts, different share-classes of the same funds, or even buying the same fund via different banks or brokers. Bottom line is: You can't control where the markets go, but you can control how much you pay in fees.
A $100,000 investment in a fund earning 7% per annum (a good return), but with a fee of 1.75% versus 0.75% will deprive you of 152% in returns ($152,000) over 30 years
Here is a cheat sheet of mutual fund fees to look out for:
Upfront Fee, Front-end Load or Initial Sales Charge: typically 2-5% in Singapore
Fee payable by you to the bank, financial advisor or broker who sold you the fund. This is charged as a percentage of your investment amount and should be negotiated.
Wrap Fee: typically 0.35-1.5% p.a. in Singapore
Fee charged by a bank, financial advisor or broker for investment advice, administration or other investment services. This is charged as a percentage of the market value of your portfolio. Make sure you know what you are getting for the wrap fee, and do not have to pay other fees on top that you thought were included.
Platform Fee: typically 0.20-1% p.a. in Singapore
Fee generally charged by online platforms (i.e. Fundsupermart) for administration of your investments and use of their platform. This is charged as a percentage of the market value of your portfolio.
Brokerage Fee: typically 0.20-0.50% of your transaction amount in Singapore
Fee charged by banks, financial advisors or brokers for executing the transaction of a fund or other financial product.
Switch Fee: typically 0.5-1% of your investment amount in Singapore
Fee charged when you switch from one fund to another. This is not common, but still exists on some platforms. You really should not have to pay this, ever.
Redemption Fee: typically 1-5% of your investment amount in Singapore
Fee payable whenever you sell or redeem a fund. Some funds progressively reduce the redemption fee if you hold your investment over a longer period of time. Also less common these days, but still exists for some retail investment products.
Expense Ratio, Ongoing Charges or Management Fee: typically 1-2.5% p.a. for retail share classes available in Singapore
An annual fee the funds will charge for fund expenses, including management fees, administrative fees, and operating costs. This is deducted from a fund’s net asset value (NAV), and accrued on a daily basis.
This is the only fee that institutional investors pay, and it is typically a fraction of what retail investors pay. For example, the same fund with both institutional and retail share classes will charge institutional investors ~0.50% and retail investors anywhere between 1-2.5%.
Trailer Fee: Typically 50-60% of the expense ratio in Singapore
This is a scary one. The elusive recurring distribution commission is paid by the fund management company to the bank, financial advisor or broker that sold you the fund. This fee is paid as long as you hold the fund in your portfolio. This means that you’re not able to see this fee directly - you will only see it as a reduction in the net asset value (NAV) of the fund and as some part of the expense ratio the fund manager is charging you. You can read more about trailer fees in our article here.