Nothing Super About Fees

    QUEENSLAND, AUSTRALIA, July 23, 2012 /24-7PressRelease/ -- Interest rates are at record lows worldwide and the majority of stock markets are lower than what they were 5 years ago. In a low return environment investors are rightly concerned with how to achieve a decent return but what about fees? 2% management fees did not matter when returns are in the double digits, now investors are lucky to be earning 5%. Over this period fees have remained essentially the same given the low returns on offer fees have become more and more significant for investors.

A government web site moneysmart.gov.au has calculated the costs, assuming an opening balance of $50,000 and fees of 1% a year. After 30 years of deducting a 1% management fee the super balance would amount to $359,000 whereas if fees were 2% the balance would be $298,000 a difference of $61,000. Looking at the sites explanation of fees further amazed me, there are not only main fees but secondary fees as well.

The following paragraphs are taken from the website.

Fees are typically deducted from your account at the end of each month or when an action is taken. Super fees can be either a dollar amount or a percentage.

The main types of fees are
Ongoing administration fees - For the general administration of your fund. Ongoing fees can vary for different investment options.
Member fees - For the account-keeping of your super account
Investment management fees - For managing your investments
Contribution fees - For each amount contributed to your investment, either by you or your employer
Adviser service fees - For advice provided about your investments in your super fund if you have a financial adviser. Your adviser may also receive commissions for certain investments.
Insurance premiums - For insurance provided through your super fund. Many super funds have a set default insurance option. You can usually choose to lower or increase your level of cover based on your needs.

Secondary fees
Here are some other fees to look out for when considering which super fund to choose:
Establishment fees - For setting up your account in the fund
Withdrawal fees- You may be charged fees every time you take money out of your super account when you retire
Termination fees - The fee to close your super account
Investment switching fees - The fee for changing investment options within your super account
Contribution splitting fees - Charged when your contributions are divided between multiple super accounts
Performance fees - Some super funds charge additional fees if your investments perform better than market benchmarks
Issuer fees - For your investment issuer's services in overseeing the fund's operations
Expense recovery fees - For out-of-pocket expenses the trustee is entitled to recover from the fund

Source: https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-fees

That's a lot of fees!

We decided to compare ten leading superannuation funds through Chantwest a comparison website. Assuming an account balance of $50,000 management fees ranged from 0.8% to 2.06%. One of the worst culprits though were contribution fees these ranged from 0 to 5.125%. At the top end this meant if you deposited $100 your account would start with $94.87. That is a years' worth of returns gone straight away just to get back to breakeven!

Warren Buffet is no fan of fees either. Buffet made a $1 million bet on the 1st of January 2008 that over a ten year period the returns on a Vanguard index fund tracking the S&P 500 would beat the returns from 5 fund of hedge funds picked by his opponent Protege Partners with the proceeds going to the winners charity of choice.

Check out the bet above right or at http://longbets.org/362/

During Berkshire's annual shareholder meeting he updated performance, see the index on the right.

As you can see the start date was horrible just ahead of the financial crisis. Hedge funds with the ability to short stocks minimised some of the losses during the crash. 2008 was an unusual year and you can see that over time Buffets pick is catching up. Buffets argument was that the fees charged by hedge funds and the extra layers of fees that fund of funds charged would offset any benefits making index returns more attractive.

The fee structure sounds similar to our superannuation system where fees are paid to superannuation funds and then the managers themselves. Investors need to find out how much they are being charged by looking not just at management fees but going through the checklist above. There are numerous hidden costs. I am with Buffet on this one investors should either index or make sure they are paying managers for performance and not fees on assets they already own.

Our firm Decisive Asset Management is based on this philosophy of paying for performance. We believe investors should not pay fees for something they already have, on assets that they earned themselves. Apart from a fixed administration fee our fees are based on the extra returns that the manager produces for investors. We believe this aligns our client objectives with our own to achieve the best possible investment performance.

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