This article was contributed to us by Michele Ferrario, Co-Founder and CEO, StashAway.
If you’re reading this, you probably know that investment fees have a direct and large impact on your returns. That’s why, when it comes to evaluating all the investment options out there, it’s important that you understand what fees to look for.
Robo-advisor fee structures versus traditional wealth managers’ fee structures are inherently different. Before co-founding StashAway, when I was looking for a place to invest my savings, one of the main pain points I had when evaluating investment products was that the fee structures were complicated, and I knew I should have been paying less for my investments. When I went to co-found StashAway, one of our top priorities was to have a clear, transparent fee structure that doesn’t eat into our client’s returns.
When evaluating investment options years ago, I fortunately knew what different fees to look out for as I spent many years working with banks and financial institutions, early in my career. But the reality is that most people don’t know to look deeply into the fee structures, where they may often find fees layered on top of each other.
What Are The Fees You Should Be Looking Out For?
It becomes difficult to evaluate an investment when the fee structure is complicated or not explicitly disclosed. But, when you know what to look out for, it can be a lot easier to know how much you could end up paying.
Typically, banks, wealth managers, financial advisors, and insurance companies charge some combination of the following fees:
Entry fee (Initial Sales Charge): This is a fee you might have to pay when you buy into an investment fund, and is usually embedded into the pricing of structured investment products. In Singapore, banks typically charge a 2.5-5% entry fee for Unit Trusts. This means that if you invest $100,000, only $95,000-97,500 will actually get invested.
Management Fee: Most portfolio managers charge a fixed percentage of assets under management on an annual basis. In Singapore, Equity Unit Trusts typically charge a management fee of 1.5% – 2.0% annually and that fee is usually split between the offering bank and the unit trust manager.
Trading Commission: The brokers may charge a transactional fee for each trade.
Withdrawal/Lock-up Fee: Withdrawal fees can vary depending on the amount withdrawn and how long you’ve had the portfolio. Ask your potential portfolio manager if there is a lock-in period or if you would have to pay a fee if you were to withdraw any amount from your portfolio at any time. In hybrid insurance-investing products, there is usually a very significant penalty/fee if you want to withdraw early.
Switching Fee: If you want to switch from one investment fund to another, you may be charged a fee that goes to the fund manager.
If you don’t see these fees explicitly stated in the investment prospectus or the contract, be sure to clarify them with the manager before you start investing. For example, typical hybrid investment/insurance products, such as Investment-linked Policies (ILPs), charge a variety of different fees that can add up to 2.5-4.0% annually, excluding penalties for early withdrawals.
Here’s an example of how your fees can really stack up: If you buy a Unit Trust from a bank, you could pay an entry fee of 2.5% to 5% of assets invested every time you buy a fund or switch funds, plus a 1.5% to 2.0% annual management fee. If you pay a 2.5% entry fee and you change funds every 2 years, on average you pay 1.25% annually. Then add a 1.5% management fee: Your total fee will be on average 2.75% per annum.
Why Do Fees Matter?
2.75% may not sound like much, but those fees can add up.
Let’s say you invest $3,000 monthly for 25 years for your retirement into a Unit Trust with pre-fees returns of 6% annually, and a 2.75% total management fee annually. Meanwhile, a colleague of yours also invests $3,000 monthly for 25 years for his retirement in a different product that also has pre-fees returns of 6% per annum, but charges 1.0% annually.
With lower fees over 25 years, your colleague will have about $400,000 more than you. That $400,000 is equivalent to 133 months, or more than 12 years, of saving $3,000 monthly! This colleague will be retired and sitting on a beach years before you can retire.
How Do Robo-Advisors Keep Your Fees Low?
From time-to-time, you may hear that a high management fees pays for the high quality of investment advice and portfolio management that you get.
So, does a fee lower than 1% per annum mean you’re not getting a quality investment management product? Not at all. It simply means that the investment product is cost-efficient (and that the manager might have your best interests in mind!).
Over the last decade, technology has enabled online wealth managers or “robo-advisors”, to disrupt the traditional fee paradigm by allowing individuals to get even better services at a lower cost. It’s not just the digital wealth managers’ low fees but their personalisation and convenience at a fraction of the cost of traditional advisors that really make robo-advisors so compelling.
Because of robo-advisors’ technology-driven automated processes, they don’t have the high overhead costs that traditional advisors have. As such, robo-advisors can pass these savings on to clients: robo-advisors typically charge between 0.2% and 1% annually, and often do not have other fees. That is 2-3% less than a Unit Trust from a bank in Singapore and translates 2-3% more in returns every year just by paying less in fees!
The automation inherent with robo-advisors’ technology simultaneously achieves lower operational costs and greater portfolio management precision; that automation usually involves systematic portfolio management, meaning no human bias gets in the way. With unbiased automation, robo-advisors can efficiently update your portfolio while delivering the high-quality investment service you expect and deserve.
Robo-advisors are becoming so prolific that McKinsey & Co. reported that robo-advisors around the world could be managing up to US$13.5 trillion worth of assets by 2020. Banks have even been adopting hybrid robo-advisors to improve their offerings, but more often than not have kept high fees by using expensive Unit Trusts instead of cost-effective ETFs in their portfolios. Why? Because Unit Trust pay kickbacks (“trailer fees”) to the banks, while ETFs do not.
Many robo-advisors have low or even no minimum investment requirement, usually no initial sales charge/entry fees, and no withdrawal fees, meaning that more people can now afford to invest their money These combined factors are why robo-advisors will soon be a common investment option for retail and accredited investors.
What About Robo-Advisors Versus Traditional Advisors With Robo-Advisor Options?
When comparing robo-advisors with Unit Trusts or ILPs, be sure to look at the expense ratio, which is the cost of the underlying investments. Most robo-advisors will use ETFs that have expense ratios of 0.1% to 0.4%.
If a robo-advisor uses Unit Trusts, your expense ratios will be significantly more expensive, adding 1.4% to 1.8% in fees in addition to the robo-advisor’s platform fee (as mentioned above, typically banks use Unit Trust in their “robo-advisory” offering to increase their margins).
If two robo-advisors have management fees of 0.5%, but one invests with ETFs, and the other invests with Unit Trusts, you should really be comparing the fees at 0.5% + 0.2%= 0.7% to 0.5% + 1.4% = 1.9%. And remember how important that 1.2% in lower fees is over the long term?
Join The Future Of Investing
If you are interested to try robo-advisors in Singapore, StashAway has a simple fee structure that ranges from 0.2% to 0.8% depending on the value of your assets under management. This one management fee is the only fee you’ll pay to StashAway.
The average ETFs expense ratio for StashAway portfolios range from 0.2%-0.3%, depending on your risk level. This means the total cost to an investor starts at 1% per annum and can go down to 0.4% per annum for large portfolios.
There are no entry or withdrawal fees, no lock-up periods, and you can change your portfolio settings and deposit whenever you want. Whether you’re investing $1,000 or $1,000,000, you’re getting access to institutional-level portfolio management sophistication at a fraction of the cost.
No matter who you select to invest your money, be sure you know exactly what fees you’re paying. It could make the difference between retiring years earlier.
If you’re keen to try out StashAway, it is currently offering DollarsAndSense readers 50% off their management fees for 6 months, for up to $50,000 in portfolio value. You can find out more and sign up here.