Following a Royal Commission that made fees one of the hottest topics amongst investors and advice clients, InvestSMART has found that paying just one per cent more in fees can slash the overall value of investments by up to 26 per cent.
Data modelling undertaken for the digital wealth provider’s research paper, ‘How fees can destroy your wealth’, showed that an investment of $100,000 in Australian shares over the 30 years to June, 2018 at a fee of 0.5 per cent would have grown to $1,207,807 at the end of the period, compared to $896,508 had the fee been 1.5 per cent.
The research showed that many investors were paying for outperformance but getting the opposite, with 78 per cent of active funds underperforming the industry standard benchmarks over 10 years and on average fund managers underperforming by the amount of their fees.
InvestSMART chief executive, Ron Hodge, pinned the high total costs of investing on fee stacking, which he described as an accumulation of apparently small fees such as advice, implementation, administration and investment management fees.
“The impact on investors is huge. The money is lost to fees, and the corresponding loss of the benefits of compounding ends up in the pockets of the middlemen and women of finance,” he said.
At the paper’s launch, InvestSMART cautioned that many seemingly good fee deals, such as BT’s recently announced flat fee or Fidelity’s zero per cent fees in the US, contain a lot of hidden or accumulation fees.
While some funds are worth the fees, InvestSMART and Australian Government Financial Literacy Board chair, Paul Clitheroe, warned that as many underperform, investors needed to be careful that they “don’t pay for a Mercedes when they're actually getting a Toyota”.
Hodge encouraged investors “do their homework” when considering fees, saying that many were avoidable or reducible. The paper also recommended consolidating superannuation accounts, getting fee breakdowns, swapping high fee products for low fee alternatives, and checking to see if product fees are worth it as ways of minimising wealth lost to fees.