Don’t Pay Unnecessary Fees on Your Investments

It is in economic times like we are experiencing at present, where people become much more careful of their expenses. In good times where employment opportunities are plentiful and financial markets are progressing well, we intend to be more relaxed about our spending and we come a little complacent when it comes to our day to day costs.

As a financial planner, I have noticed that when markets are performing well and investments are increasing in value, most investors do not take a lot of notice of the fees that they are paying on those investments. There are fees attached to pretty much all investments, however, in this hub I am going to concentrate on fees attached to Managed Funds, Allocated Pensions, Account Based Pensions and Superannuation Funds. In other hubs, I will talk about other financial and personal insurance products.

I am also going to discuss the roll and the remuneration of the adviser.

There may be some terms in this hub with which you may not be familiar. Ihave a Frequenty Asked Questions page where you can view a detailed explanation as well.

Managed Funds, Super Funds, Allocated Pension and Account Based Pension, come to us in many different forms. They can be purchased as a standalone product or they may be marketed to you by way of a Portfolio Wrap Service or an Investment Platform.

Chances are however, no matter how it is presented, if you purchased the investment direct from the fund Manager, or through a Financial Planner, Investment Adviser or a Broker, you may have paid an entry fee in the first instance and more than likely there is a trail commission being paid from your investment. In some cases there may even an additional adviser fee being paid as well which is usually negotiated with the adviser for ongoing advice.

These Entry Fees,Trail Commissions and Additional Adviser fees are in addition to the fee which is paid to the Fund Manager who actually manages the fund. This fee is usually called the "Underlying Fund Manager Fee" and furthermore, if you happen to have a "Wrap Service" or "Investment Platform", there is usually an administration fee attached to these as well.

Firstly I would like to say that SOME of these fees are justifiable, particularly the Wrap and Platform fees. These investment instruments are there to perform particular functions and in most instances, in particular where superannuation is concerned, they take much of the legal and compliance burden from the investor.

However, there are fees such as trail commissions and additional adviser fees, which in some cases, can be not so justifiable.

Trail commissions on investment were devised in the early nineties and were introduced to assist the adviser in the day to day running of his or her financial Planning practice. In the early days of Financial Planning, if indeed it could be called that back then, there were no trail commissions or ongoing adviser fees, which meant that an adviser was concentrating more on the next piece of business than the existing investor. I was around in those days and I can testify that it was not an environment which encouraged proper planning and review practices. In some ways, it is understandable why this was the case. Introductory commissions was all that the planner had to live on because there was no other way of earning a living.

Financial Planning has come a long way since then and this is predominately due to, amongst other things, a regular income being generated by trail commissions and ongoing adviser fees.

Over the past few years there has been many a campaigns waged by the industry funds and unions about trail commission suggesting that they are simply ripping of the consumer and lining the pockets of the financial planners. In some cases these comments may be at least partly justifiable, however, I can say with experience that obtaining proper, qualified advice and ongoing advice and reviews, can save you thousands of dollars in the long term and will assist you in obtaining all benefits that you are entitled too, be it taxation, Centrelink or from the investment houses themselves. Sometimes it is the things we don't know and don't do that cost us money and or get us into hot water. The savings and benefits of a properly constructed investment strategy can greatly benefit you and well and truly outweigh the costs.

On the other hand, there are cases where investors are paying relatively large amounts of fees on their investments, some of which are directly attributed to ongoing advice and service which is not forthcoming.

Unfortunately, the trail commission system has harvested complacency amongst some advisers because fees are charged to the investors funds normally on a monthly basis and are forwarded to the adviser. This means that the adviser is paid whether the client receives the ongoing service or not.

The problem which has arisen in the last decade is that a lot of investors are paying for the service and advice by way of trail commission but are simply not getting what they pay for. In some cases that I have come across, the investor hasn’t seen their adviser since they made their initial investment and in other cases the investor has never met their current adviser because the original adviser has gone and they have been passed to someone else.

The answer to all this is of course a pure Fee For Service arrangement. A fee for service simply means that, when you need qualified advice you ask for it and pay for it and when you don't need it or don't receive it you don't pay for it.

The fee for service adviser would charge a flat hourly rate (or "a la carte" rate) for his or her services, instead of taking compensation from commissions on investment transactions which is usually based on a percentage

A fee for service model would mean that you initially obtain written advice from a Financial Planner and then you make the recommended investments without the entry fees, exit fees or trail commissions, much like an architect draws plans for your home. The plan would then be implemented by the investor by way of a Discount Broker Service or if needed, with the help of the planner, and if the investor needs ongoing advice and reviews then he or she pays as the advice is given. If you use a discount broker service, for a relatively small annual fee, you can access most funds without paying entry or exit fees, and the trail commissions are paid back to you in cash. You have full control of the investment.

The fee for service way of investing is a much fairer and transparent model and it would ensure that the consumer gets what he or she paid for. If you don't get the service and the proper advice, then you don't have to pay. This is the way that most services are delivered these days and I think it is time that this model is adopted in the investment arena. There will of course have to be some adjustments on behalf of both the planner and the investor but I think it would make for a better and fairer system all around.

The fee for service structure of compensation perhaps allows investment professionals to do well for themselves while taking their clients’ best interests to heart. These types of professionals allow investors to access professional expertise while gaining independence from compensation-based advice.

It should be noted that commissioned services may very well be the most suitable for some investors, particularly in the case of a smaller portfolio where less active management is required. Of course the adviser needs to keep in regular contact with these investors. For anybody who has a very large portfolio to manage, whose investment objectives necessitate frequent attention and active asset allocation, the fee for service model is a must have.

Below are some examples of the fees which can be levied against your fund.

ENTRY FEE - This is a fee which is generally paid to the adviser or broker but can be retained by the Fund Manger if you invested directly with them. This fee is generally between 1% and 6%. On some Agricultural Products it can be as high as 10% however, this is normally paid to the adviser out of the fund manager's coffers and is not attributed directly to your individual investment. It is important to note however that the money is coming from somewhere and at the end of the day it is your fund.

EXIT FEE - Exit fees come in several forms. The first is the Deferred Entry Fee. This is because the adviser/broker received an upfront commission when you initially invested and which was not taken out of you original capital. If you withdraw your investment before the fund manager was able to recover this commission(usually over five years) the fee will be levied. The second is simply a fee paid if you didn't pay an entry fee on your initial investment and the adviser received an upfront commission. The latter is very rare these days.

MANAGER FEE or UNDERLYING FUND MANAGER FEE - This is a fee that you will never avoid.

The management fee is the cost of having your assets professionally managed. A charge levied by an investment manager for managing an investment fund. The fee pays other people to select which securities your money (along with that of the other investors in the fund) is invested into, to do all the paperwork needed and to provide information about the fund's holdings and performance.

Management fee structures vary from fund to fund, but they are typically based on a percentage of assets under management. For example, a mutual fund's management fee could be stated as 0.5% of assets under management.

This fee can be between 0.1% to 1.8% depending on the structure of the fund. For example, a typical cash fund may charge 0.3%; An Australian Equity fund may charge between 0.5% to 1.2% and a more sophisticated fund or say a very active international fund may charge 1.85%

Underlying Management Fee

The underlying management fee is the same as above but it is usually expressed as the underlying management fee when it is in an Investment Platform or Wrap Service

TRAIL COMMISSION - Trail commissions on investment is a fee usually expressed as a percentage of the value of the investment and is paid to the adviser on a monthly bases. This fee is usually between 0% and 0.6% but can be higher.

ADITIONAL ADVISER FEE - This is a fee which is negotiated between you and your adviser and is for review and ongoing advice. This fee is on top of the trail commission and can be any amount but usually between 0.1% and 1.1% depending on the size and complexity of the portfolio. This fee can be a flat fee instead of being based on a percentage of the value of the fund.

SUMMARY

In all cases you will be paying the underlying fund manager fee. In most cases you will be paying the trail commission or some equivalent fee. In some cases you will be paying the additional adviser fee and again in some cases you would have paid the Entry Fee or the exit fee if you withdraw before the exit free period has elapsed.

If you would like to know more about investing without the high fees, visit my web site at http://financialplanningandinvestmentgroup.com.au/cashback.html

There you can invest yourself without the fees. You can even start saving on fees immediately on your existing investment by nominating Financial Planning & Investment Group as your broker with a simple form. I will even help you fill in the form.Good luck

Max Harrington