Understanding investment fees
If you’ve only got a minute:
- Even though they are often glossed over, you should take note of the investing costs such as brokerage fees, management fees and custody fees, when investing.
- Knowing the fees involved is important in determining the value of your investment as they eat into your gains.
- Different products will incur different types of fees, a breakdown of which is usually available on the relevant product information sheets such as the fee schedule or prospectus.
Whether you are shopping for a new bag or purchasing a new home, there are often other costs that are added to the purchase price. This can range from shipping fees for the product to the stamp duty you pay for a property purchase.
There are also other costs that are factored into the overall price of the good or service. One common example is when you get your daily cup of coffee. The price you pay for your cuppa includes not just the cost of the raw materials but other elements too.
When you enjoy your daily cuppa, you know there are costs for:
In this case, how much you value these elements will determine how much you are willing to pay for the product.
An overview of investment fees
When it comes to investments, there are also inevitable costs that will take away from your eventual returns. Knowing what they cover will help you understand the value you get for the money you pay. Some examples of these include costs of processing, manpower, product development and creating distribution channels.
These costs are at times, unseen or unknown to the investor. We breakdown what some of them are so that you are better acquainted with them when you invest.
Commission, redemption fees or brokerage fees
These are incurred at the time of purchasing or selling of a product, as a fee for executing the trade. When charged at point of purchase it is known as a front-end fee, and at point of selling it is known as a back-end charge. Most distributors usually charge one or the other, not both.
These fees cover the costs of:
They can be charged as a percentage of the total transaction amount or a fixed dollar amount per transaction. There may be a minimum sales charge imposed as well. As such, it becomes more costly to make small transactions, as compared to making a single large transaction.
Some platforms offer amalgamation of trades which allows for all trades performed during the same day to be combined. With this, instead of paying a minimum charge for each smaller trade, you can total up the individual trades, thus saving on the fees to be paid.
These are charged for the administration and management of a pooled investment.
Management fees are required to cover the costs of:
These are not charged directly to the investor, but instead deducted from the net asset value of the respective exchange-traded fund (ETF) or unit trust, reducing the value of the investment over time. That said, this does not mean that you are getting negative returns on your investments.
Unit trusts, which are more actively managed, tend to charge a higher management fee than passively managed ETFs. This is due to unit trusts often having a team of professionals buying or selling underlying investments to rebalance the portfolios as necessary.
Given the differences in fee structures between various pooled investment instruments, it can be challenging to do a dollar-to-dollar comparison of the total costs involved. The total expense ratio (TER) comes in handy here as it reflects the total expenses of managing each fund as a percentage of its total assets. One of the main reasons why investors pay attention to TER is so that they can determine if a fund is an appropriate investment for them after fees are considered.
These are charged for holding and administrating your assets and can be a percentage or a flat rate fee.
In the past, these were physical custody papers that required safekeeping. This has been digitised but still requires the services of a custodian. Some examples of these services include dividend entitlement, corporate event notifications and regulatory reporting.
Some other fees include platform fees, holding fees, clearing fees, trading fees, settlement fees, and goods and services tax (GST).
Fees charged differ from platform to platform, so it is important to check the website of your bank or broker for the detailed fee schedule when calculating your investment costs.
This article is an overview of the kinds of investment-related fees you’re likely to come across in your investment journey. A further breakdown of product-specific costs and how they can affect your returns can be found here:
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
Disclaimer for Investment and Life Insurance Products