They say free advice is worth about what you paid for it.
The same applies to investment funds, you won’t get anything any good for nothing.
Equally you can pay too much, since money has attracted the greedy throughout history, and still does. However there are good funds run by good people, you just have to be diligent and make haste slowly before parting with your money.
There are brokerage fees when buying and selling shares. All funds have management fees, and management expenses (MER’s). Additionally there may be fees for holding your investments on a platform such as Aegis, and adviser fees, it all depends on what you invest in, and the level of service you require.
Bonds usually have very low trading costs and sometimes it appears there are no fees. However a broker may “shade” the return, so he/she gets paid some commission, which means you might get a tad less interest.
Some brokers may charge a fee instead, which is better since you know what you are paying. On new issues the broker might get paid some commission by the issuer.
Brokerage on shares
It can cost as little as 0.35% to buy and another 0.35% to sell if you DIY on line.
Through a broker who does it all for you, it commonly costs 1% each way. The real cost is 0.35% with 0.65% being commission paid to the broker.
If the broker helps you build a diversified portfolio and provides good on-going advice, the 1% may be worth it.
There are several types of share funds, including index funds, ETF’s, managed funds and asset class trusts.
Index funds are the cheapest since they hold an index, such as the NZX top 50, or the ASX top 300, or the S & P (US) top 500 shares. They don’t do research on any of their shares, and just hold them all in proportion to the index. As they do not research or pick the best or worst, their costs are super low at around 0.1%. These shares are not very sophisticated but they have their place. Your return is the same as the share market – e.g. world markets have averaged over 10% since 1926, but with lots of ups and downs.
ETF’s are exchange traded funds, in most cases do not stock pick either, but they do hold different types of assets, and there are thousands of them e.g. internet technology, high yield shares, US bonds, UK bonds, healthcare shares and the list goes on and on. Again the costs are low, commonly around 0.2% pa.
Managed funds employ a team of professionals fund managers and claim they can pick the right shares, avoid the wrong ones, forecast economic events, and so do better than the index. But they mainly don’t, and since they employ a lot of experts, their costs are as high as 2% and even 3%. Since stock picking is not easy, my experience of manage funds has not been satisfactory. The other problem is that they disclose their management fee, often around 1%, but not always disclose other expenses (MER’s).
Asset class funds take the good parts of the index fund model and improve on them by putting all available stocks through a sophisticated filter, eliminating unstable countries, stock exchanges that are not properly regulated, stocks that are not liquid, or in distress, and many more. However they don’t stock pick or forecast and so don’t need a big team of expensive experts, hence their costs are low at 0.4% pa.
What should you pay?
As low as 0.8% overall if you do it yourself.
We offer a full service everything-done-for-you model using asset class funds that costs about 1.5% pa all - a tad more under $250,000, and less over $500, 000, and less again over $1 million. That’s everything, including fund fees, MER’s, adviser fees, and the Aegis Platform fees. Aegis is very secure place for your money, all fees are tax deductible, and no, we don’t take any commissions.
If you are paying over 2%, it had better be really good.
Remember to add the not-always-easy-to-see MER’s.
Commissions nearly always come out of your money too, so they are a fee too.
Our tip list is growing
Tip No 10 – know what you are paying and whether the fees are adding value or not?
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is now available.
Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.