Investment Fees Part 1: Understand the Fees Before You Invest
In part one of this two-part series, Charlie O’Flaherty, partner, head of digital strategy & distribution at Crossbridge Capital, sheds light on the fees involved in investing.
Most of us are familiar with one of the most famous quotes by former US Supreme Court Justice Louis Brandeis, “sunlight is said to be the best of disinfectants” but his idea is actually better expressed in a letter he wrote 20 years earlier. In 1893, Brandeis wrote: “if the broad light of day could be let in upon men’s actions, it would purify them as the sun disinfects”. While the “incorruptible” Brandeis famously pushed for transparency in government throughout his career, his words are just as apt when considering your investment portfolio. This month I’d like to shed some (sun)light on fees, both disclosed and hidden, and examine their effect on your long-term returns.
If like most high net worth investors, you probably don’t know exactly what investment-related fees and expenses you are paying. To begin with, you likely have investment accounts at 3 or 4 different institutions, each of which have their own reporting format and fee disclosure policy. If that’s not complicated enough, many of your portfolios probably feature products that carry individual embedded fees. Let’s pull back the covers and expose some common fees.
This is typically expressed as an annual percentage of assets under management (AUM), and generally well disclosed and can range from 0.5% to more than 3% depending upon the services provided and geography (we tend to pay higher fees across the board here in Asia). Your banker may also refer to this as the management fee. One thing about these fees that you may not know is that they are often negotiable. Another caution here – if your advisor doesn’t charge an AUM-based fee then they likely derive their compensation through commissions and retrocessions. While there is nothing inherently wrong with this model, it is often quite opaque to the investor and the nature of the revenue model does not necessarily align the goals of the advisor with those of the client.
Many fee-based advisors utilize packaged investment products within your portfolio for various reasons. In some cases a packaged product, like an ETF, might be the most efficient way to gain exposure to a given asset class. Other times, an advisor’s strategy may involve allocating your portfolio to top-performing fund managers. What is not often disclosed though, is that, in both cases ETFs and Mutual Funds generally carry their own expenses ranging from less than 0.2% up to more than 2%. On top of disclosed expenses, most funds also carry 12b-1 or marketing fees. All of these embedded or stacked fees act as a drag on your portfolio.
Transaction fees can vary widely but common charges found on your statement may include ticket charges, custody fees, wire transfer fees, account inactivity fees and price discovery fees (for less liquid investments) - all of which should be considered when evaluating your investment performance. While these fees are technically disclosed, they are often buried in the small-font terms and conditions at the back of your statement.
As savvy investors, you should be aware of these main fees. In the next part of this series, I’ll talk about the impact of fees on your portfolio and what you can do to mitigate it.
Charlie O’Flaherty is partner — head of digital strategy & distribution at Crossbridge Capital. Crossbridge Capital is a global wealth manager who recently launched CONNECT by Crossbridge, Singapore’s first fully functioning robo-advisory platform for Accredited Investors.
The views expressed in this article are those of the author and not the author’s company. This material is provided for educational purposes and should not be construed as investment advice or an offer or solicitation to buy or sell certain securities.