Decoding Fund Manager Fees: How to Maximize Your Investment Returns

And so today we're doing another batch of questions that we'd received from Angela and she had sent through kind of an amazing list and I'd got through half of them last time and I thought they were really good questions . So I'm going to cover another batch today .

And so the next question from Angela was to kind of explain she uses the phrase unpack , unpack financial services , provider and fund manager fees and the impact on your profits when you're an investor , so just to give the kind of the jargon there .

So when we invest money , we are going to , let's say , we're going to invest in a retirement annuity provided by a unit trust company there are going to be some fees that you have to pay . So the first thing is you're going to need to pay .

It's called an admin fee or a platform fee , because it costs money for the unit trust company to provide you with a retirement annuity , and that's because they pay a life assurance fee .

So the government regulates all retirement funds and endowments as life assurance , and so that means that there's quite a lot of life assurance license requirements and all those things and they get covered by a platform fee or an admin fee .

So typically those will cost you in the region of half a percent down to 0.2 percent depending on the platform that you pay , and I think that you don't really want to pay much more than kind of around about that half a percent , ideally around 0.4 percent , and it will reduce , especially for those who make bigger investments .

So it does make sense on these admin platforms that the more money you allocate there , the lower your fees will be and a lot of the time they'll give you a benefit .

If you've got a retirement annuity , you've got a tax-free and you've got a normal kind of unit trust , that if you put all of that on one platform , that you will get a benefit from consolidating a lot of your investments on one place . And I don't mind that .

It doesn't mean that you need to put all of that money into one fund or one range of funds from one company .

A lot of these admin platforms will offer you a range of different investment options , from index tracking unit trusts through to actively managed unit trusts as well , and it will be from the provider , whatever that company is , but also it will be from external or third party providers .

So lots of these platforms will offer up to kind of 200 , 300 different unit trusts from different companies , and so you've got an enormous amount of choice . So generally , angela , when you start investing , you will have an admin fee that you have to pay .

The contrast to that would be that you go and buy , let's say , a retirement annuity from an insurance company and there you will still be paying fees . Although it's harder to see , it's not as transparent . It's kind of the word I'm looking for .

I'm trying not to use rude language here , and so to me , my experience , those fees are significantly higher than when you buy them from a unit trust platform . So I think when you've got an endowment or a living annuity or a retirement annuity or anything like that , using an admin platform from a unit trust company makes a lot of sense .

I'm not convinced I would use an insurance company platform . Even if they offer a range of different unit trusts , their fees just generally tend to be higher . They've got a lot more legacy admin costs and I don't like those and I think it's not as transparent as it should be .

So that would be the first cost that you would pay , and then you would pay for the actual fund that you've selected . So let's use our retirement annuity example . So you've paid an admin fee , and it's 0.4% a year .

In addition to that , you've chosen a balanced unit trust because it's a retirement annuity and you might be paying 1.2% or 1.3% a year for the unit trust . So let's just say it's 1.3% . So now you're paying 1.3% for the unit trust . Plus you're paying 0.4% for the admin .

So you're at 1.7% a year for fund manager and admin , and those would be the normal kind of investment costs that you would pay . As a direct investor . You shouldn't be paying any upfront fees , you shouldn't be paying any transaction charges and if you were to move the money , you shouldn't pay any costs to transfer from a unit trust platform .

You will definitely get charged a penalty from an insurance company , and it's another reason why I don't like insurance company investors .

So the only other fee that you might pay on top of that , angela , would be an advice fee if you've chosen to use an advisor as well , and those would be , you know , most instances would be the three layers of costs that you would pay . There will be inside the fund that you own .

There will be some transaction charges that they would pay , you know , when they're buying and selling your shares or your bonds or your other instruments inside the balanced unit trust . But those are costs that you would see . You wouldn't have to pay them .

In addition , it would be part of the fund manager charges and would be explained to you usually as something like a TIC total investment charge or a TER total expense ratio . So it's worth just understanding what those costs are .

I mean , I have spoken a lot about costs in the past and I think it's important that you understand what your costs are and make sure that you don't overpay when you use an investment . You don't want to end up in a position where you're paying so much in costs that your investment doesn't grow . That doesn't make sense to me at all .

So you should focus on fees . At the same time , you shouldn't focus only on fees . I think that that's a mistake that a lot of people can make . So make sure that you know you choose . When you're choosing a platform , for example , don't necessarily just go for the cheapest platform if they're going to deliver a terrible service .

You know there are some platforms out there that you know will subsidize the cost of the platform if you use that company's unit trust , and very often you end up paying nothing for the platform but you can't get your tax reporting done correctly , so you pay SARS penalties .

If you've retired and you've got a living annuity , you can't get your living annuity payments every month because the admin is so bad . So to me I don't ever want free admin because you're going to get the equivalent of free service , which means terrible service .

So I'm happy to pay a fair fee for admin and I think over the last 20 years that's been one very big life lesson for me was I always focused on lowest cost first and gave that the most prominent kind of place in my ranking selections or whatever my criteria .

But over time I've realized that you can spend hundreds , if not thousands of hours over a year on bad admin and none of us want to spend our lives on that . So I'm happy to pay for good admin , as long as it's a fair fee and , as I say , between 2.2% . If you've got a very large amount of money , up to 2.4% is a fair fee For a unit trusts .

I think somewhere in the region of half a percent a year for a money market fund , up to a maximum of about one and a half percent a year for an active general equity or balanced fund . I think those are probably fair fees . And again you want to make sure that you're paying for value . And again you want to make sure that you're paying for value .

So you don't want to go and pay a total investment charge , a TRC of 3% a year , for a fund where actually all you're doing is you're making the fund managers and their promoters rich and you're not growing your money . So I think an admin fee of 0.4 , a fund management fee of one and a half makes a lot of sense .

If you're using an advisor , I don't think you should be paying upfront fees to an advisor if you're also paying annual fees . So I think you're either paying upfront fees or you're paying annual fees and in that instance annual fees will range from about 1% a year to kind of 0.3 . Size is important .

So if you're a smaller investor , you are going to pay a higher percentage and the reason is because it takes quite a lot of work . You almost end up doing the same amount of work to take on a small client as you do , to take on a big client . So advisors and platforms , everybody needs to be paid for that .

So I think just be careful there that you don't say , well , I'm going to go and choose the cheapest fund , the cheapest admin and the lowest priced advisor and you end up getting really rubbish service and rubbish advice . It's important that you make sure that you do things correctly .

Then Angela's last question is when you're investing in exchange-traded funds and indices I'm going to add that to Angela's question and say this also applies when you're investing in normal unit trusts as well . Do you have to wait for them to be cheap , like when you buy shares ? Is it better to buy in bulk or do you wait until you've got cash ?

How would you kind of make that decision when to buy ? So I think , angela , you always want to focus on transaction costs .

So if you've got a debit order going into a unit trust , you're not paying transaction costs , in which case , doing a monthly fee or a monthly investment into an index tracking unit trust or an exchange traded fund or a normal unit trust , if there are no transaction fees , by all means do a monthly amount , because then you're phasing your money into the investment

and you're kind of smoothing out the effects of market timing . In that instance I really wouldn't worry about whether the investments are cheap or expensive . The truth is , investments can get a lot more expensive or a lot cheaper and we don't know what's going to happen . We can't even tell what's going to happen with the weather in three days' time .

So trying to predict whether investments are going to do better or worse in a week or a month is impossible . You have to rely on the fact that you choose the right investments and you give yourself five to 10 years for those investments to grow .

That certainly will be very valuable for you and that's a much more certain outcome on your investments than worrying about whether they're cheap or expensive . So I think for monthly amounts , if there are no transaction fees , then certainly do everything every month , do your investments every month .

But if you've got lump sums and you might pay transaction charges , then you would rather do larger transactions where the transaction fees will be small as a percentage of the capital that you're investing .

So then you might want to build up a bigger lump sum and only invest every three months or every six months if needed , but I think you want to do it on a fixed program . So choose a fixed time .

So say you're going to do it every third month or every sixth month and don't worry about what the stock markets are doing at the time , because the truth is they're so volatile Currencies are volatile , interest rates are volatile , politicians are volatile . So worrying about that stuff and then trying to time the markets is really not going to help you at all .

So rather , be disciplined , have a fixed program and enjoy the long-term growth and don't worry about the short-term fluctuations . They're just going to drive you crazy . Thanks so much , angela , for your questions and for our listeners . Please keep sending them . Voice notes are great . You can send your questions to us . You can find us on Honest Money .