Understanding the Layers of Fees

on Thursday, 28 February 2013. Posted in ,
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hidden_dudeRecently we noticed a commentator on the SmartShanghai.com article saying that “the fees on all platforms are pretty much the same, so it matters more on how you use it”.   We completely disagree.The range of fees in products is vast.  It has a substantial impact on the returns you achieve.We have discussed why it makes sense to have lower fees many, many, many times.  Still, it can be a confusing subject, so here is a short note to describe, roughly the layers that you can face.

A bit of knowledge can go a long way to protecting yourself and squeezing out some higher returns.

So what layers do I need to ask about when I invest?

1. Investment Product Level

  • Entry and Exit
  • Management Costs

2. Trading Costs

3. Fund Costs
  • Entry and Exit
  • Management Fees

Now, we don’t like to create more enemies than we already have out there, so we are going to describe product fees without using any names.  We will call them the Red, the Blue and a Managed Account.

Blue Account Red Account Managed Account
Platform Exit Restricted Exit Restricted Exit No restrictions
Platform Management 6% p.a. 3.5% (2%+1.5%) $10 per month
Trading Costs 0 0 $1 per trade
Fund Entry 0% 0-2% (average 1%) 0
Fund Management 1.2% + 0.5-2.5%Average 2.5% 0.5-2.5%Average 1.25% 0.18%-0.5%Average 0.3%
Total 8.5% p.a. 5.75% p.a. 0.3% +$120 per year

Some would argue that fund fees aren’t part of the product costs.  That’s true, but they are still costs that will affect your investment return, so it’s worth knowing what they are.  Professional investors and pension fund managers use exchange traded funds (ETFs) due to their big cost advantage over mutual funds higher management and entry costs.  So should you.

As you can see, the total effect adds up over time.  Now some product providers talk about “bonuses”.  We wonder why they need to offer a bonus if their product is already so wonderful.   Well, I think the answer is pretty clear about why.  And if you do the sums, it is not nearly enough.

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