# Do you know the fees you’re paying?

Most investors don’t have a clue how much they pay across all the different types of fees they are charged. There are fees for advice, administration, investment management, tax planning, and more. The examples below are intended to help you better understand these fees and roughly calculate how much you pay in total. Many investors who do this calculation are shocked at how much it comes to.

An example will demonstrate the importance of minimising investment fees. Imagine that over your 40 years in the work force, you put 10% of your annual income into superannuation each year. Let’s assume that your income starts at \$50,000 per year and then grows at 4% per year above inflation of 2.5%, and your investments deliver an annual, after-tax return of 5% per year above inflation, but before fees.

If the total annual fees you paid were 2% (200 basis points) of your accumulated super, then after 40 years you have \$1.9 million in super. If instead, your fees were 1% (100 bps), then you have \$2.3 million. Cutting fees by 1% leads to a 21% increase in the amount of money retirement in this realistic example.

#### Calculating fees

The first step towards ensuring that you are not paying too much is to understand how much you are paying today. The following examples are intended to help you calculate the total percentage (and dollar) amounts you are currently paying.

Total fees for different types of investment and advice

#### Example 1: Financial advisor and retail super fund

Evi and Karl’s investible savings (other than the family home) are \$580,000 of super. The couple’s financial advisor, Steve, has put their \$580,000 of combined super into one of the big retail super funds (MLC, CFS, BT and AMP are the largest).

They pay: 1.00% (for advice) + 0.65% (for administration) + 0.75% (for management) = 2.40% of \$580,000 = \$13,900 a year.

There are three levels here. Financial advice from their advisor. Administration from a retail super fund. Investment management from various fund managers.

Advice: Evi and Karl meet with their advisor once a year to discuss:

• their financial goals
• how much they need to save to meet those goals
• what they should invest in (asset allocation) and in which managed investment funds
• whether they should borrow to invest in property
• how much insurance they need
• how to minimise tax
• how they should structure their investments (do they need an accountant to set up an SMSF, a family trust, etc.)

Steve charges 1% (100 bps) of their super balance for this advice.

Administration: The retail super fund charges the couple 0.65% (65 basis points) for administration of the super fund, which involves:

• the creation and governance of the super fund
• access to a large number of different managed funds (for investing in Australian shares, global shares, fixed income, commercial real estate, infrastructure, etc.)
• buying power to access those managed funds at low cost
• calculation of the couple’s share of value in the super fund (which has many thousands of members)
• preparation of reports for Steve, and some smaller things

Management: Steve chooses which retail super fund to put the couple’s \$580,000 into. Then he looks at all the different managed funds that the retail super fund gives access to and chooses a managed fund for Australian shares, global shares, commercial real estate, etc. On average these funds are charging 0.75% (75 basis points) for the effort they put into researching and choosing the shares or properties that they invest in. The 75 bps would be more if not for the buying power of the retail super fund (which many billions are invested through).

Tax and structuring: Evi and Karl’s taxes are simple. They file their taxes online using ‘intelligent’ online software that takes them through the process and costs a small amount (negligible compared with their advice, administration and investment fees).

#### Example 2: No advisor and industry fund

Faiz and Mary’s investible assets are \$620,000 in super plus a negatively geared investment property (for which they pay the rental agent 8.5% of the rent, which I will ignore here). They both have their super in the ‘balanced’ option of their industry super fund (the biggest industry funds are AustralianSuper, Hostplus, HESTA, REST, and Unisuper)

They pay 0% (for advice) + 0.12% (for administration) + 0.76% (for management) = 0.88% of \$620,000 = \$5,500.

Advice: Faiz and Mary have never spoken to a financial advisor. They wonder whether they might benefit from advice but have put that off until their situation becomes more complex.

Administration: Their industry super fund charges an administration fee of 0.12% which covers the costs of collecting members’ super payments, calculating account balances, providing annual statements and answering members’ inquiries.

Management: Faiz and Mary’s industry fund manages some of its members’ money in-house and pays external managers fees to manage the remainder. The 0.76% fee covers all of the costs of this investment management. The couple chose the ‘balanced’ investment option and the industry fund makes decisions on asset allocation and choice of investment managers on their behalf.

Tax and structuring: Faiz and Mary pay a tax agent about \$300 to complete their income taxes, but only because of the tax rules around their rental property, so I have ignored the tax expense above.

#### Example 3: Brokerage firm and SMSF

Axil and Wei have considerable investible assets: \$2.4 million in an SMSF and \$1.8 million in their family trust, which continue to grow quickly. This is in addition to the ownership of their family home and the business created and run by Wei. Their investible assets are managed by an advisor of a brokerage firm (some large brokerage firms are JBWere, Morgans, Ord Minnett and Evans).

They pay 0.95% on \$4.2 million (for advice, administration and management of their Australian shares) plus 0.50% extra (for management of global shares and some commercial property trust investments – see below) = 1.45% of \$4.2 million = \$60,900. Their accountant’s fees (structuring and taxes) are \$6,800, which is 0.16% of their investible wealth. They have paid 0.95% since they started with the brokerage firm but are considering asking for a reduction to 0.85% now that their investible assets are larger.

Advice: Axil and Wei speak with their advisor three or four times a year. There is a scheduled annual meeting when their advisor takes them through the changes to their investments and performance of their portfolio over the year. But there are also ad hoc telephone conversations when their advisor is considering large changes to their investments or their advisor wants to offer them a particular investment opportunity. These include investments in property trusts, initial public offerings of shares and even investments in some start-up companies.

Administration: Advice, administration and management of the Australian share portfolio are bundled together in the 0.95% fee charged by the brokerage firm.

Management: The brokerage firm manages Axil and Wei’s portfolio of Australian shares in a ‘separately managed account’ that is not pooled with the shares of their other clients. However, their investment in global shares is through a managed fund that charges 1.50% per annum, and their investment in private commercial property trusts has a fee of 1% per year. In total these extra fees are equivalent to 0.50% of their \$4.2 million of investible assets.

Tax and structuring: Axil and Wei’s accountant provides tax advice and prepares their personal tax forms, as well as the financial reporting, taxes and audit of their SMSF and family trust. The same accountant is used by their business, but those fees are charged to the company.

#### Concluding remarks

Fees, taxes and transaction costs are, in one sense, all the same thing for investors. They are all money out, and that needs to be minimised. But ‘minimised’ doesn’t mean ‘set to zero’, because everyone needs some level of help, especially with tax planning and structuring (SMSFs, family trusts, etc.). The advice you receive might lead you to save more, take the right amount of risk, manage your taxes effectively, etc. which will lead to better outcomes. Minimising fees just means getting value for the fees that are paid.

How much do you pay annually in fees, with total fees broken down into advice / administration / management / structuring and tax? Try to work it out yourself. But if you have a financial advisor then ask them. If you don’t get a clear and direct answer, then that is a problem. There is obviously a great deal more to discuss on this topic, but this can start your conversations.

Dr. Sam Wylie is a Principal Fellow of the Melbourne Business School and a Director of Windlestone Education. Please seek professional advice on structuring and tax planning from a qualified accountant or financial planner. This article is for general information only and does not consider the circumstances of any individual. A longer discussion of fees and managing your relationship with advisors is part of my Finance Education for Investors course. Go to Windlestone.com.au/melbourne or Windlestone.com.au/perth for more information.

### 22 Responses to Do you know the fees you’re paying?

1. Steve January 3, 2019 at 11:54 AM #

If you have \$1.6 million in the CBUS Growth Super fund, your fees are approx \$13,600 pa. (ie flat fees vs flat dollar fees) Little wonder SMSFs are booming.

2. Jerome Lander November 20, 2018 at 11:58 AM #

The real cost of having your capital poorly managed dwarfs all of these ‘fees’ and issues. Unfortunately poor money management is very readily accessible at scale – if not routinely available. Good money management is challenging, more “expensive” and probably never identified by anyone worried purely focussed on low fees.

There is this crazy focus on purely understanding the price, rather than the value and the opportunity cost of not investing well.

• Warren Bird November 20, 2018 at 10:13 PM #

Jerome, I think that’s a different issue to what the article is addressing. The point it’s making applies even to situations where you’ve identified good active managers who are adding value. The question remains valid, do you know how much you’re paying for that?

One of the modern trends is to include performance fees. They’re conceptually more ”aligned” with the investor’s interests, but if in any one year you get a couple of your managers underperform and one that outperforms takes say 20% of their outperformance, you can end up with a high fee and yet your total portfolio doesn’t do all that well.

As I say, the question is valid even in an active management situation that you’re happy with – do you know how much you’re paying for it? And do you know how much your adviser is charging you to help you find those decent managers?

At the end of the day it’s the active managers who are doing well that are more likely to rip you off than the index manager charging a low fee, using arguments very much like the one you’re espousing. “Don’t worry so much about fees, just keep paying us and we’ll come good eventually.”
No, the truth is that you have to spend even more time evaluating whether the active managers are charging appropriately for their skill.

In other words, it isn’t a ”crazy focus” on price, it’s a perfectly valid question! It’s one that I ask of all the managers in my funds, both personal and professional.

3. Eliza November 18, 2018 at 11:24 PM #

We pay an Advisor a flat fee and a Platform supposedly a flat fee but as the amount changes from month to month they have clearly changed to a % – we were not advised of this.
AND there are other non recorded fees. Those for the Managed Funds into which our capital is invested Fees varying from .95% up 2% but the actual annual amounts are not shown anywhere. I think if we had the actual annual amounts and added them to the Advisor and Platform fees we would feel a great deal more then depressed!
It really is time that fees be calculated on performance not capital.

4. Graham Hand November 16, 2018 at 2:27 PM #

Please see attached Overview from the Productivity Commission, Figure 5, to see whether the numbers in the article are much different from PC findings. https://cuffelinks.com.au/wp-content/uploads/Overview-Draft-report-Superannuation_-Assessing-Efficiency-and-Competition-pp35-37.pdf

5. Rick November 15, 2018 at 11:36 PM #

I’m a financial adviser and many of these numbers are not far off the mark, although I agree platform costs for admin/investment are now below the quoted numbers. The salary and performance assumptions are much more bullish than financial planners would go with.

However, a 1% advice fee is pretty standard, and no adviser I know charges a dollar amount.
The 0.95% on \$4.2m (\$39,900 a year) is outrageous but it’s a true reflection of what many advisers in the big end of town charge. Cheers

• SMSF Trustee November 19, 2018 at 11:50 AM #

Mine does, Rick.

My total fees come to 1.1% of my portfolio. Administration and advice totals about 0.3% and fees for funds management (some zero for directly owned shares and TD’s, some passive and some active) account for the rest.

A few people seem to misunderstand about how fees are charged within a super fund. They don’t come out of the 4% pension drawdown, so there isn’t the impact on how much people have in their pocket to live on that JP and others have expressed such horror about. They’re accrued within the fund and are part of the total return on the assets. Whether they represent value for money is a separate question, but some of the taking offence that’s been expressed here is simply not warranted.

6. Joel November 15, 2018 at 2:55 PM #

Agree with the comments so far. Does the author actually understand the fees that typical funds and advisers are charging in the real world these days?

And who is to say that the client in the industry fund doesn’t pay for advice?

• Graham Hand November 15, 2018 at 3:47 PM #

Perhaps it’s true that new arrangements entered into now are at cheaper levels than described in the article, but I’m often surprised when people tell me their existing fees.

• Wal November 21, 2018 at 10:03 AM #

1% for advice and 0.65% for admin? It’s more like 0.4% and 0.3% these days. He did underestimate the MER/ICR number though. There’s one part of the market not lowering their fees. Not easy to get the MER under 0.75% for active management.

7. rob November 15, 2018 at 2:27 PM #

Actually, I know the couple, Faiz and Mary. It’s a sad story really. Because they didn’t appreciate the value of financial planning advice the following happened to them:
They are very risk averse so they switched to 100% cash and ended up dramatically underperforming all the other investment options
They didn’t understand about insurance so didn’t bother taking out any life, TPD or IP. Faiz unfortunately contracted a terminal illness and couldn’t work. They had to sell their investment property and their home because they couldn’t make the mortgage repayments.
Mary would have qualified for a Centrelink Carer Allowance of \$4,000 per year but they weren’t aware of it
Faiz sadly died. Mary had to use up all of his super to supplement the family’s income and childrens’ education costs. She wasn’t aware of salary sacrifice options and so ended up with very little super at retirement.
Mary is now in public housing on a full age pension.

• Peter November 16, 2018 at 3:31 PM #

Very good.

• Wal November 21, 2018 at 10:04 AM #

Perfectly put. Well done sir.

8. Phil November 15, 2018 at 2:10 PM #

I think one author in a recent book describes this as science v scientism, that latter being the use of ”academic’research to sell something. The figures used are not reflective of current market pricing. The author would only have had to have googled platform pricing. Evidence based strategies rather than straw man or anecdotal please.

9. Duncan November 15, 2018 at 12:06 PM #

Too general in terms. It’s like saying, ignore Windlestone Education, the fees are too high, read a book to educate yourself…but is that responsible reasoning.

10. Sean November 15, 2018 at 10:57 AM #

It would be nice to see a like for like comparison using up to date costs rather than the three very different examples used here. I don’t know of too many retail funds that are charging 1.3% combined for admin plus investment and most seem to be under 1%, but interestingly enough after the changes to how industry funds have to report their costs several of them, Hostplus being a prominent example, are over the 1% mark.

Also it shouldn’t be too surprising that an investor who is using an adviser is paying for that service, but they are also hopefully getting some good advice on maxing out their concessional contributions, cash out and recontribution strategies etc which they wouldn’t be getting if they are effectively looking after it themselves and the benefits of which far outweigh the extra costs incurred.

11. Shane November 15, 2018 at 10:27 AM #

Fees Fees Fees. What about returns after fees? Surely that is the biggest indicator of value for money?

• Derek O'Hare November 16, 2018 at 1:10 AM #

Theoretically this would be true. In practice… what data do you have to suggest it is the case?

12. Melinda Houghton November 15, 2018 at 10:22 AM #

It is now uncommon for financial advisers to charge a percentage based fee, and many administration fees for platforms are significantly lower than 0.65% also.
Most of my clients pay total fees of less than 1.5% for active management, platform reporting and adviser service.
Why make it sound so expensive to be advised?

• POC November 15, 2018 at 11:28 AM #

Agree. Extremely uncommon and for many, many years. That said, all numbers in this table are not representative?

• J.P. November 15, 2018 at 6:37 PM #

Melinda Houghton wrote
“”””
It is now uncommon for financial advisers to charge a percentage based fee, and many administration fees for platforms are significantly lower than 0.65% also.
Most of my clients pay total fees of less than 1.5% for active management, platform reporting and adviser service.
Why make it sound so expensive to be advised?
“”””

For someone accumulating wealth throughout their life, the cost of 1.5% total fees is enormous.
This documentary explains it clearly.
https://www.youtube.com/watch?v=SwkjqGd8NC4

For someone retired on a 1 million dollar portfolio, around 4% per year drawdown would be reasonable to have a high chance of lasting through an average retirement, which is \$40,000/year.
Your 1.5% fee is \$15,000 of that leaving them with \$25,000 to live on.
The fact you say this isn’t so expensive is offensive.

• Aaron November 18, 2018 at 2:49 PM #

1.5% is an enormous amount. 38% of someone’s 4% annual withdrawal.

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