Okay, I’m the first to admit that fees on financial products is probably the least sexiest topic on the internet (except to advisors and fund managers maybe) but really it ought to be and I was reminded again why today in a conversation with a so called “wealth manager.”
Let me just say firstly that I don’t blame the investing public for not taking more of an active interest in this area. I mean the industry is so rife with technical jargon and mumbo jumbo that it’s hard for a financial journalist to follow the plot on fees let alone someone who is just cutting their teeth on KiwiSaver.
Management expense ratios, trailing fees, embedded costs, active vs passive funds manager…and that’s just the beginning.
In journalism we have this saying: there is no such thing as a stupid question. I’ve heard a few doozies in my day and I’ve undoubtedly asked a few dumbs ones myself, but it never ceases to amaze me how the one that is usually on every journalist’s mind but everyone is too scared to ask for fear of coming across a dunce ends up being the Big Kahuna.
During a long overdue phone call that I had to initiate (NOTE: you shouldn’t have to if you are paying 2.5% in fees!) to find out how my kids education funds were performing, I was left with a bad taste in my mouth. While I’m comfortable now talking to advisors in their own language, you really shouldn’t have to. The industry is old enough now and the problems of financial obfuscation so well signalled since the Global Financial Crisis, conversations that advisors have with their clients should be understood by a high school student.
I’m willing to bet not many high school age students, let alone university graduates would know what the heck a management expense ratio is let alone how to calculate one. Then again, I bet not many advisors know how MERs are calculated either. However, one thing you can be assured of is they know how to price in their costs.
If management expense ratios (the sum cost extracted from your investments and paid to the managers) weren’t bad enough, where there are advisors involved there’s another fat layer of fees.
It depends on advisor relationships with fund managers just how much each party gets but the key thing to remember here is these fees are a permanent part of your portfolio and that’s regardless of how well – or poor – your fund does. Managers and advisors continue to take their fees, every year, well usually every month actually because they, more than most, understand how compound interest works. The longer you stay invested and the more money you invest, the bigger their take. This is why KiwiSaver is a gravy train for the funds management sector in New Zealand, with savers locked in till 65.
Under new regulations in New Zealand, financial advisors and a whole raft of other operators slogging products are required to tell you up front how much they are paid and how their payment system works. These legal disclosures, now so extensive and weighty in scope, can take the better part of an hour so who can blame the client for their failure to understand even at the end of these well intentioned truth telling sessions, particularly if the language used to communicate it is financial speak.
Oranges, apples and lemons
Another key thing to note is unless you have a proper benchmark for comparison, how the heck is anyone to know whether the fees being charged, even those that are clearly spelled out and communicated, are low, medium or high?
In my case, my advisor (advisor is a stretch of the definition) casually declared (after I had to ask) that fees were 2.5%. Knowing as much as I do about fees (and I don’t consider myself an expert) I called him on it. In a what I construed to be a belittling tone, he explained that in addition to the investment costs for the funds under management, I was paying that premium for the “advice.”
As I hadn’t talked to him in two years, or received any reports either for quite sometime, I had to question whether the value I was getting for that premium.
Clearly, he didn’t like the question and couldn’t get me off the phone fast enough after that. To my mind, unless you are receiving advice, and good advice at that, you shouldn’t be paying anything more than 1.5% max on managed funds. Yes, there are some exceptions, where you are making long-term above average returns but believe you me, not many are. That’s why most active fund managers, invest their own money in index tracking funds that have the lowest fees.
In their defence, advisors will talk about making “apples to apples comparisons” reminding you that all these increasingly scathing reports on fee gauging has to take into account, whether managed funds are built in with an advice component. They rationalise their above average fees but suggesting that without their good advice you’d be all the poorer, having made ostensibly poor investment choices.
You don’t know until you try I suppose.
To find out how much you are paying in fees, relative to other funds (be they KiwiSaver fees or other types of managed fund) consult the league tables (published by the likes of the NZ Herald) or else go to the Morningstar website.
At the end of the day, ignorance really is bliss no more so perhaps than for financial industry operators who get rich off the backs of investors and or consumers who don’t know any better.
For more on fees, how to avoid getting burnt by them and to sharpen your financial edge without the usual dull tomes that line the business bookshelf, order a copy of my book Money Matters; Get Your Life and $ Sorted. It will pay for itself in saved fees and then some.
And for more reading on this topic, check out this story by the Financial Post in Canada.
Amanda Morrall is a New Zealand based personal finance expert. Her first book Money Matters was published in 2013 by Penguin Random House in NZ.