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Fees, investment

Fees: Too much vs not enough. We’re focusing on the bigger picture

In Australia, management fees charged to savers by investment and superannuation managers get a lot of air time but in fact they are actually less than half the story.

The most important element for investors is not fees but net returns, i.e. what’s left for the investor after fees are deducted.

It’s certainly true that Australia’s superannuation account holders spend over $30 billion a year on fees and costs, as reported last year by Industry Super Australia.

On its own, that looks like a staggering number, feeding into the already strong suspicion among people who have watched the Royal Commission hearings that there’s a conspiracy afoot. But actually those fees still only represent around 1.1 per cent of the $2.7 trillion now sitting in Superannuation accounts in Australia.

And the pie is growing every year by much more than those total fees. Just six months ago the total pie stood at $2.3 trillion, which means that in that short time it has grown by $400 billion in a supposedly hostile financial climate.

Fees aren’t negligible. Because of compounding, a one per cent difference in annual fees now could represent a difference of 20 per cent in a member’s balance in 20 years’ time.

But by the same token, you would get the same result with a one per cent difference in average annual performance. What’s more, good financial managers produce results that are more commonly two to three per cent better per year than poor managers.

Minimal correlation

A recent analysis of super funds over ten years by consultants SuperRatings concluded that in the low fee sector, there are just as many high performing as low performing superannuation funds. In effect, there was minimal correlation between fees and returns.

But there’s a twist. While the best performing high fee funds produced a net benefit of 21 per cent and the best low fee funds provided an equivalent benefit of 29 per cent, it actually worked the other way with the poor performers. The high fee funds managed 27 per cent overall and the low fee funds 23 per cent.

A further analysis of the same numbers revealed that a standard superannuation account starting with $50,000 in 2007 and added to via the Superannuation Guarantee could reap anything between $37,705 and $62,482 in net returns over the succeeding ten years depending on whether the manager was in the bottom or the top performance quartile.

That is a difference of almost $25,000 or a potential net outperformance of 65 per cent, which rather places the fees debate in context.

Conclusion: keep an eye on fees but keep a closer eye on net returns.

 

This article is part of our investing starter series. You can read more of this series here.

These are the views of the author, Andrew Main. This is general in nature and does not take into account your personal circumstances.