Management Fees

Types of fees - and how to minimize them!

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

Whereas brokerage fees are the fees charged by a broker to buy and sell shares for you.

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

Be aware that the fees you pay can have a significant effect on the return you achieve over time.

Stock market related managed-fund fees are a source of concern among investors who choose to use this type of financial product.

However, 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.

They 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 need access to a fee calculator. Many mutual funds provide their own calculators for clients.

Two 'arms length' sites that provide calculators that compare products across funds include WalletPop and the managed investment fee calculator at the Australian Securities and Investments Commission (ASIC) website.

Types of Mutual or Managed Fund Fees

The fees that investors are charged in managed funds may include ...

An entry fee or up-front fee that may be rebated by an adviser or discount broker. Investors should be able to avoid paying this fee.

An annual management fee commonly described as the Management Expense Ratio (MER), including investment management fees and performance fees. The ongoing management fee commonly ranges between 0.5 up to and 3 per cent.

A performance fee which is a more recent phenomenon, with most references to performance fees appearing in the last five years or so.

Be aware of the type of performance fees that may be charged. Typically, these are 20 per cent of any out-performance 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.

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

Minimizing Fees

Ways of minimizing 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 ...

Use 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 the fees as a result.

The Management Expense Ratio (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. Platforms, variously labelled as 'wraps', master trusts or investor directed portfolio services (IDPSs) are all designed for one purpose: to simplify (at a price) the administration, management and reporting of the increasingly complex portfolios investors accumulate.

They consolidate all the investment reporting and administration, and send the investor regular portfolio valuations and tax statements.

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.

Consider Mezzanine funds. They provide good returns and are a quasi-wholesale product, and 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.

To Conclude ...

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 favor. Negotiating the best fees is as important for value investing as it it is for any other form of investing.

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