Make sure you understand what fees you’ll pay before you invest — you’ll usually pay them even if the fund produces a loss, and a small difference in fees can mean thousands of dollars in the long term.
Contribution/entry fee: an upfront charge (up to 5% of your investment) also payable whenever you add money to the fund. Some funds offer Nil Entry fee options, but beware, usually higher management fees apply and you may also have to pay an exit fee.
Exit fee: percentage fee some funds charge when you leave. In many cases this will be reduced on a sliding scale and may not be applied after a certain time.
Ongoing management fee or Management Expense Ratio (MER): usually expressed as a percentage or dollar amount deducted from the fund’s assets. The Management Expense Ratio (MER), or Ongoing Fee Measure (OGFM) or Indirect Costs Ratio (ICR) are ways of calculating the ongoing management fee. There are large differences between MERs. For example the MER for actively managed international share funds ranges from 0.7% to 3%, with an average of 1.8%.
Trail: ongoing commission to the adviser or discount broker who introduced you to the fund. It’s included in the MER and usually ranges from 0.25% to 0.88%. For example up to $440 per year for a $50,000 investment.On top of the trail some financial advisers charge an adviser service fee for ongoing service.
Switching fee: may apply if you switch between investment options within a fund. If the new option has a higher contribution fee you may have to pay the difference.
Buy/sell spread: most funds charge more for units you buy than they pay for units you sell. The difference between the buy/sell price and the unit’s true value is usually 0.1% to 0.6%. The manager may have to sell and buy investments if you sell or buy units. The buy/sell spread protects other unit holders from these costs as the amount is paid directly to the fund, not to the fund manager.
Performance fee: rewards fund managers if they meet or exceed a specified performance target. The target may be based on a benchmark such as a share market index. If the fund outperforms this benchmark a percentage (usually up to 20%) of the over-performance is charged as a performance fee.
Negotiate and save
Managed fund fees can eat a big hole in your investment returns. It definitely pays to negotiate the lowest fees possible.
Decide how you want to invest in managed funds. Do you need assistance from a financial planner or are you knowledgeable enough to go it alone?
If you need advice
- Ask your planner what fees apply and what level of service you’ll receive. Is the planner just placing your investment or will you get ongoing service? Contribution fees are usually negotiable; the planner can rebate up to 100%.
- Ask the planner whether ongoing commissions are included in the management fee (trail) or charged separately (adviser service fee). Are there different options (dial-up/dial-down) or is it a fixed charge? Will they rebate trails if you pay a fee for their service? How does the planner’s fee compare with the cost of the ongoing commission? Take the cheaper option.
- If you have a large amount to invest your best option might be to go to a fee-for-service financial planner who rebates the trail or places your money in wholesale funds, wraps or master trusts that don’t charge a trail.
TIP: depending on how much you invest and what service you need, paying a commission may be cheaper than fee-for-service. But make sure you know how much you’ll pay, what you’ll get for it and what your options are. Regularly review whether you’re happy with your planner’s service and advice. Change planners if you’re not satisfied.
If you don't need advice
Use a discount broker. They normally discount the contribution fee up to 100% (but they still accept trails).
TIP: If you’ve already invested funds with a planner who draws a commission from your contribution fee but doesn’t provide ongoing service and you’re making ongoing contributions to your investment, you can transfer your funds to a discount broker. Check their website for a broker transfer form.