Home / Opinion / Fees, fees, fees – what do they all mean?

Despite the world of investment and superannuation seemingly becoming more streamlined by the month, the manner in which many firms and products charge has only increased in complexity.

Despite the world of investment and superannuation seemingly becoming more streamlined by the month, the manner in which many firms and products charge has only increased in complexity. Unfortunately, this has been the way of many parts of the finance industry since its early beginnings, with ever more complex names for simple, reasonable fees.

In this article I’ll attempt to lift the veil on the many fees that investors, both advised, unadvised and those using industry funds may be levied during their investment journey. You may not always see the fee explicitly stated to you, but it is there. For simplicity, I have provided them in alphabetical order.

• Adviser Service or Ongoing Advice Fee: Adviser service fees are the primary source of payment to a financial advice. They are paid in return for services ranging from quarterly portfolio review reports, regular meetings, support with paperwork, ongoing superannuation, and investment advice. They are typically offered in three ways:
  • As a percentage of your assets – the industry standard being 1.1%
  • As a fixed fee – based on the level of annual work required
  • As a performance fee – where you reward your advice based on the value, they add to your investment portfolio
• Brokerage Fee: Brokerage is charged on all share transactions as payment for the stockbroker or online platform to facilitate and settle your trades. It is calculated as a percentage of the value of shares traded with an average of around 0.11%.
• Buy sell spread fee
• Custodian fee: Custodian or Custody fees are typically associated with investment platforms including Net Wealth, BT Wrap or MLC. The fee is paid to an external party who is employed to manage and audit your investments and the platforms record of them on a daily basis for complete accuracy. The cost is normally a few hundred dollars.
• Indirect Cost Ratio or ICR: One of the more confusing measures, the ICR as it is known, is the all up cost of an investment option, My Super for example. It includes all indirect costs for investment management, but not those paid by the member directly. It can also include compliance, administration and other costs paid by a fund manager in offering their fund to you.
• Implementation fee: Whilst uncommon, some advisers still charge an implementation fee which effectively covers the hourly cost of implementing the advice to you. Be wary if these is a percentage of the investments recommended, which could suggest a conflict of interest is present.
• Management expense ratio or MER: One of the most misunderstood fees, an MER represents the fee charged to your by a fund manager, ETF or industry super fund (investment fee in this case) for investing your capital. It is always expressed as a percentage of the amount invested and is paid from the earnings within the fund; it is not an out of pocket expense. The fees covers things like wages, registrations, brokerage and administration costs. MER’s are higher for actively managed funds and lower for ETF’s given the investment decisions are automated. Importantly, an industry super funds investment fee does not include any ongoing advice, just investment management.
• Performance fee: As highlighted above, a performance fee is similar to your MER, but is only charged where a certain level of performance is achieved by a fund manager of adviser. For example, a global share fund may charge 10% for outperformance over the S&P500 index, meaning if they deliver 1% better performance, they will be paid another 0.1% in fees from your investment. This type of fee better aligns managers with investor interests.
• Placement fee: One of the more contentious fees, placement fees aren’t a cost to investors, but rather a payment to those selling investment products to you. For instance, recent IPO and LIC share offers paid stockbrokers and financial advisers amounts of between 1% and 3% of the capital you invested as a reward. This comes from the cash within the LIC or ASX share, not from your pocket.
• Platform fee: Platform fees are the costs charged by the likes of Netwealth, BT or MLC to deliver their superannuation or administration platforms to you. The costs are usually around 0.3% per year and deliver services including comprehensive taxation reporting, low-cost implementation, reduced paperwork and administration support.
• SOA Fee: The cost of receiving initial advice from a financial adviser, via the provision of a legislated Statement of Advice document.
• Transaction fee: Similar to brokerage, but typically a one off, fixed dollar value transaction fee paid to a platform to invest in a managed fund on your behalf.
• Trustee Fee: Not unlike an SMSF, all superannuation accounts must have a trustee to guide the investment decisions. Platforms like Net Wealth or MLC act as your trustee for a small, percentage based fee.
• Underwriting fee: Another contentious fee, but not paid by investor directly, the underwriting fee represents the costs paid to the managers of an IPO, preference or LIC issue for bringing it to market or helping to raise capital for a company. For instance, if company A is seeking to raise $10m they may partner with two institutions or managers and offer 3% of the capital raised; if all the capital is raised they will be paid $300,000 with the remaining $9.7m going to the company.