Uncovering secrets about investment fees
Full-service flights command a premium pricetag. That’s because chefs are hired to develop inflight meals, a generous baggage allowance is given, and you get to choose your seat.
Think of investment fees in the same way. There are many types of fees, and some are aimed to help you on your investment journey – even if they seem to be “hidden” fees.
Investment fees cover a range of services: administration and advisory, management of the product, and the supporting personnel or digital systems. They are sometimes included in the overall cost of your investment, and sometimes presented to you as a separate charge.
Let us uncover these different investment fees.
Think of upfront fees as the ‘service fee’ that airlines charge when flights are booked with their agents. The amount you pay is usually calculated as a percentage of the total value. For example, you pay S$200 to invest S$20,000, if the upfront fee is 1%.
|Types of upfront fees||Assets|
|Commission fee / brokerage fee||Equities|
These are charged to cover the costs of:
- Using a platform to place a trade
- Having a relationship manager or broker to provide advice and place the trade for you
How do I get more value from my upfront fees?
Since upfront fees are like an entrance fee, be sure to get the most value out of it.
#1 Place the trade yourself
Traders provide value by offering personalised advice and services before placing the trade for you.
But if you place a trade by yourself via an online platform like DBS iWealth® instead, the fees are typically lower.
#2 Buy in bulk
There is usually a minimum fee for making trades. By buying (or selling) in bulk, you pay a fee once, instead of many times for multiple smaller transactions.
#3 Leverage on amalgamation services
Consider the amalgamation service that is often offered by brokerages. It allows you to combine the trades made on the same day and calculates your fees only once at the end of the day, to allow you to save on the sales charge. When using amalgamation services, the trades made have to be the same stocks of the same action taken.
An example of how amalgamation works
Investment management fees go to the fund manager, whose job is – like the pilot and air crew – to get you to your destination. This fee covers:
- Extensive research when building the fund
- Close monitoring of the market to respond appropriately to market conditions
- Active management to achieve the fund’s investment objectives
In a well-run fund and under favourable market conditions, this fee will be justified by the consistent returns generated by the fund.
Custody fees go towards the administrative costs of safe-keeping your investment assets, much like airlines’ baggage allowance. Even though physical custody papers are no longer required when you buy stocks and funds, the purchase still requires the services of a custodian.
Why do I still need to pay for Custody Fees?
The custody fee ensures the safety of your assets. It also covers services that facilitate the transactions related to your investments, such as collecting your dividend and interest income, providing a statement and notifying you about corporate events such as compensations, cash payments, redemptions, stock dividends.
Switching and penalty fees are similar to the charge that is involved when you change or cancel your flight.
Some funds allow you the flexibility to switch between funds, provided the new fund is managed by the same fund manager. Depending on the fund house, you may be charged a switching fee.
Some investment products have fixed maturity or redemption periods, which means that you to commit to it for an agreed period. If you redeem early, you may incur service charges or get back a smaller amount than you had originally invested.
Now that it is clearer what fees you are paying, you are in a better position to decide if your current arrangements provide good value.
As always, read the product factsheets before investing. Understand the terms and conditions of your investments, and do your sums before you make a trade.
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.