Many fees are applicable to financial products and services, and can be referred to in a number of ways as well as incorporate a number of services. Some of the more common fees applying to investing and seeking financial advice are discussed below.
Investment transaction fees cover the costs of buying and selling investment assets:
Entry/Exit fees – Entry fees are usually charged as a percentage of the amount invested. Exit fees are usually charged as a percentage of the amount withdrawn but may only be charged if withdrawals are made within a certain timeframe and/or if no entry fee was charged.
Unit price spread/margin – In unitised funds, the unit price can fluctuate according to the value of assets in the fund. When there is a spread, the unit withdrawal price is always lower than the unit-buying price at any given moment.
Switching fees – This fee may be charged when switching asset allocation within the same fund or provider.
Brokerage/Real estate fees – Charged by stockbrokers, these can be a flat fee or be charged as a percentage of the transaction amount. Real estate transactions also attract fees of a similar nature.
Investment management fees cover the costs of managing and administering the investment:
The Management Expense Ratio (MER) – This ratio enables the costs of managed investments to be compared. It shows what extra costs are incurred in using a managed fund structure instead of investing directly. The MER is not charged in addition to management fees.
Management fees – Fund Managers research and rebalance the fund’s assets regularly. Management fees are generally charged as a percentage of the value of the fund’s assets. While there is no direct cost to the investor, the fee is included in calculating the fund’s unit price. The level of management fee can vary depending on the management style (active or passive) and the level of funds invested in growth or defensive assets.
Administration fees – These fees cover the cost of administering the fund, such as issuing statements, and meeting other trustee/fund requirements and obligations. Fees for similar services may be referred to by certain funds as ‘Asset Based’ or ‘Trustee fees’.
Platform fees – A platform enables investors to diversify over investment types such as direct investments, managed investments, cash accounts and superannuation under a single reporting system. Similar to an Administration fee, it covers the reporting and administrative costs. Performance fees – This may be charged if the performance of the fund exceeds pre-determined benchmarks.
Professional fees cover the costs of providing advice and maintaining portfolios:
Advice fees – These are charged by financial planners to provide professional advice. They cover the gathering of client information, research, formulation and presentation of a financial plan.
Ongoing service/Review fees – These fees are charged by financial planners to maintain client portfolios, which usually include research, periodic client reviews and ongoing adjustments to portfolios. Due to regulatory changes, these fees have effectively replaced commissions.
Commissions – Commissions are now banned under the Future of Financial Advice (FoFA) regulations. However, commissions may still apply under certain pre-existing arrangements and the sale of certain products. Commissions are usually charged as a percentage of the funds invested and are paid to the financial planner or other financial services intermediary. Trailing commissions, if applicable, are paid to financial planners while funds remain in an investment.
Accountant/auditor fees – Fees charged from these professionals may apply to investors for managing their finances, completing taxation returns and meeting compliance requirements for trustees of Self-Managed Superannuation Funds (SMSF).
Implementation fees – These may be charged to set-up and implement the recommendation of the planner. They may be included as part of an Advice Fee. As you can see, there are many fees and costs to consider. When assessing an investment, it is important to fully understand all fees and charges that may be applicable, as providers may market their products based on low fees. For more information, contact your financial services provider or financial planner.