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Finances can be painful with high fees - humble savers

IMPORTANT – Since Posting this in 2011, we have seen many advisers and product manufactures move to be more transparent with their fees and in many cases, the fees have reduced. This article will be re-written. In the interim, please read the article in the context of what fees to review when seeking advice.

If you have an investment portfolio of $200,000 and it earned a gross return of 8% (before fees) for the next 20 years, the combined financial adviser (financial planner) and product fees could easily amount to over  $350,000!

Why are financial adviser fees so expensive?

The majority of Australian financial advisers are tied to a major financial institution. These institutions manufacture products like managed funds (unit trusts),Wrap accounts (often called an All In One Account). The financial adviser typically includes these products in his/her recommendations as shown in the table below.

Fees related to a typical $200,000 Investment Portfolio

Service/Product Fees  Up Front

Fees  On-Going

Adviser fees (his/her work) $3,000.00 (Plan Fee) $2,000 = 1% of Portfolio
Investment (Managed) Funds $1,500 (buy sell spread)^ $1,500 = 0.75% of Portfolio ICR^^
Wrap Account Usually Zero $1,600 = 0.8%  of Portfolio
Total Year 1 estimate $4,500 $5,100 = 2.55% of Portfolio
All fees are approximate. ^Cost to purchase the funds. ^^ICR Indicative Cost Ratio, estimate of the on-going fees to manage the funds.

The main purpose of this article is not to precisely question each fee, but rather to demonstrate how the combined fees will affect your investment portfolio.

The up-front fees – You are affectively down $4,500 (over 2%) before you make any investment earnings. These fees often look expensive and are usually the focus of the client. However, it is the regular on-going fees that really hurt.

Total on-going fees into perspective – Assuming your portfolio had a gross investment return of say 8%, the net return (after fees of 2.55%)  is 5.45%. Or to put it another way, more than 30% of your investment return is being eaten away in fees! The table below provides further examples.

Investment Portfolio of $200,000 with a 20 year term – Balance after fees

Gross Return

Zero Fees 1.00% Fee 2.00% Fee 2.55% Fee 3.00% Fee

6%

641,427 530,660 438,225 394,130 361,222

8%

932,191 773,937 641,427 578,045 530,660

10%

1,345,500 1,120,882 932,191 841,702 773,937

Referring to the table, a Gross Return of 8%, with Zero Fees, the balance after 20 years would be $932,191. With fees at  2.55%, your $200,000 has only grown to $578,045. Total fees charged = $354,146  ($932,191 – $578,045 = $354,146).

Can you reduce your fees?

  • Challenge your financial adviser on each and every fee linked to your portfolio
  • Is your adviser prepared to work for a lower fee? Will they work for a flat fee? A fee per consultation?
  • Do you need a Wrap account? Is there a cheaper administration system? Can your accountant do it cheaper?
  • Shop around your portfolio. See three new advisers. Use the web to do your research. The Financial Planning Association provides a service that will help you find a local adviser.
  • Your own research should include friends and colleagues. Often friends have gone through a similar experience and may well be in a good position to help you with finding alternatives.
  • Can you do it all yourself? There has been a massive take up in Self Managed Superannuation Funds (SMSF), also known as Do It Yourself Superannuation. Effectively, investors are doing it themselves to have greater control and reduce the overall costs.

If you only reduce the fees from 2.55% to 2%, without affecting the gross returns, you can earn an extra $63,382 over the 20 years assuming an 8% gross return.

As we often say here at humble savers, “Forewarned is forearmed”. There’s a real battle out there for your hard earned cash and you should do all that you can to build and protect your financial future.

Important – This is a summary of an article written by Colin Williams for mozo.com.au – What every investor should know about financial adviser fees

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