Australia’s investment industry needs to improve its fee transparency as excessive fees, hidden fees and accumulated costs are severely eroding investors’ savings, a digital wealth provider has warned.
InvestSmart’s new paper, “How fees can destroy your wealth: Understanding the total cost of investing”, said data modelling revealed someone who had invested $100,000 in Australian shares over the 30 years to June 2018 at a fee of 0.5 per cent would have $1,207,807 at the end of the period.
However, a fee of 1.5 per cent would have netted just $896,408, almost 26 per cent less.
The research paper also found 78 per cent of active funds underperformed industry standard benchmarks over 10 years, dispelling the myth and promise of higher-than-average returns.
From financial advice fees to platform fees to fund manager fees, the total costs involved in investing are having a significant impact on investment outcomes, it said.
The paper’s key message is that fees matter, with an action plan also included for investors to consider.
Commenting on the findings, InvestSmart chief executive Ron Hodge said in most cases, fees rather than returns make the biggest difference to investors’ quality of life in later years.
“What we found is many investors are paying for outperformance and getting the opposite. Our research shows that on average, fund managers are underperforming by the amount of their fees,” Hodge said.
“We want to help investors understand the depth and the extent of fees they are paying and the impact it has on their savings over time because a small number can make a big difference.”
He said the high total costs of investing are caused by “fee stacking”, which he defined as an accumulation of apparently small fees, including advice fees, implementation fees, and platform administration and investment management fees, which can easily add up to 2 per cent a year.
“The impact for investors is huge. The money is lost to fees and the corresponding loss of the benefits of compounding ends up in the pockets of the middlemen and women of finance,” he said, adding investors must realise many fees are avoidable or reducible.
“There are now plenty of low-cost alternatives to financial advice, including scaled advice offered by super funds and independent research.”
Across the board, product fees were also coming down, he noted.
“If you’re heading down the passive route, just look for a low fee and if you prefer an active manager, make sure it has the performance track record to justify the fees being charged,” he said.
During the paper’s launch in Sydney today, InvestSmart head of funds management Alastair Davidson said: “A takeaway from the report is that you have to go and look for the fees these days because it’s not all clear.
“And the industry is doing itself no favours with things like zero fee [claims]. Transparency in fees is what’s needed.”
InvestSmart chairman Paul Clitheroe added: “In the investment world, a lot of people are paying for a Mercedes but they’re in a Toyota.”