Management Fees

Management fees are charged to cover the costs associated with managing your investment on your behalf.

Fees vary from fund to fund, so it is important to be aware of the fees charged and what options may be available to minimise the fees paid.

The fees you pay can have a significant effect on the return you achieve over time.

While stock market related managed-fund fees are a source of concern among investors who choose to use this type of financial product, one needs to take into account that managed funds can give access to investments which may be otherwise difficult to access by the individual investor.

The difficulty in controlling the level of fees appears to relate to the lack of purchasing power of the individual small investor compared to institutions who have the investment clout to be able to negotiate lower fees on their own behalf.

To see the impact of fees on your own circumstances, you can access a managed investment fee calculator at the Australian Securities and Investments Commission (ASIC) website.

The fees investors are charged in managed funds may include:

• an entry fee
• an annual management fee
• a performance fee
• a withdrawal or termination fee

The annual management fee is commonly described as the Management Expense Ratio (MER) and includes investment management fees and performance fees.

The ongoing management fee commonly ranges between 0.5 up to and 3 per cent.

A withdrawal fee or termination fee may be charged for each withdrawal you make from a fund (including any instalment payments and your final payment) or for closing you account with the fund.

Performance fees are a more recent phenomenom with most references to performance fees appearing in the last five years or so.

Ways of minimising fees depend to some extent on what sort of funds you invest in and the management structures that are put in place. Here are some examples ...

• Using an index fund instead of an actively managed fund is an obvious strategy as the index manager only replicates stocks in the relevant index. This requires less activity compared to that required by the manager of the actively managed fund - and lower fees as a result.
• The MER on growth or international share funds is generally higher because of the greater involvement and experience required from the fund manager.
• Avoid the use of platforms as the costs add to the fund fee.
• Invest in wholesale funds as they are cheaper but may require a larger amount to be invested. However, they may not be worth it if you are already in a managed investment platform as additional fees may apply.
• Mezanine funds, which provide good returns and are a quasi-wholesale product, may be an alternative to being in a platform.
• Use a separately managed account (SMA) or individually managed account (IMA) instead of a fund account.
• Use a discount fund broker who will usually rebate some fees.

Be aware of the type of performance fees that may be charged. Typically, these are 20 per cent of any outperformance over a certain benchmark.

However, some have an absolute return hurdle, or require that the fee is based on the the difference between the relevant benchmark and the fund return. But the return must be positive - which makes sense to me.

In the final analysis, agreeing to a particular fee is like agreeing to a price on anything you buy. Many fees are variable and, depending on the questions you ask, can be negotiated in your favour.



Return from Management Fees to Managed Share Funds