It's what the Consumer's Institute calls a "fee fiasco". On the surface a fund you invest in may be growing in leaps and bounds. But the real return to you isn't what it appears.
When you first invest in a fund you'll be charged what's called an "entry fee". This is a chunk of money, which is often up to 5% of the total amount you've invested. That means of every $10,000 you put in, only $9,500 ever makes it into the fund to start growing in the first place.
Then there are annual fees. These may just include the annual administration fee charged by the fund manager, which is often around 1-1.5%. But many investment advisers such as financial planners take a cut of your investment as well. It's often called an asset management fee and can be as much as 1.5% on top of the fund manager's fee.
Finally, when you want to sell your investment, you might be charged an exit fee as well, which could be anything from zero to 1.5%. Fortunately this is a one-off fee, not an annual one. But it still has the effect of reducing your returns.
A few percent here and there is nothing, say many financial planners, for good advice. But if you can make your decisions yourself, then it's best to bypass large fees and pay as little as possible.
The total you pay in fees isn't your main worry. It's the lost profit potential that's an investor's biggest concern. Take for example, the AMP Capital Investor's Strategic Equity Growth Fund, which has been growing at an average of 13.49% each year for the past five years. With a 0.75% entry fee and annual management fee of 1%, a $10,000 investment would be worth $93,228.39 over 20 years. Change that to a 5% initial fee and 3% annual fund and adviser fees in total and your investment would be worth $57,338.16 at the end. That's a massive amount to lose and you still need to pay tax on that.
It shows that even a high performing fund can have its returns significantly blighted if you don't buy wisely.
If you do need to take advice before investing, then consider paying a one-off fee for that advice and monitor your own portfolio, rather than getting into a situation where you're paying for that advice over and over again each year through fees.
For more information visit: www.sorted.org.nz/fees.html
Diana Clement
Independant Financial Commentator