This document discusses various fees associated with managed funds. Active managers try to achieve returns higher than the market index but may charge higher fees. Passive managers match the market index and have very low fees. Entry and exit fees are usually around 4% and paid to the financial advisor. Buy-sell spreads of 0.3-1.0% cover transaction costs. Administration fees, called the Management Expense Ratio (MER), normally range from 1.4-2.0% per year and cover advisor commissions and fund management. Wholesale funds have lower MERs but require higher minimum investments.

1. GENC3003Personal Financial PlanningAndrew Hingstonandrew.hingston@unsw.edu.auUnit 14: Managed fund performance and fees

2. 2PerformanceActive fund managers try to time the market and pick shares so that they can achieve a better rate of return (given the risk they take) than the All Ordinaries index.Higher fees in return for possibly higher returns!Expect All Ordinaries + 0.5% at the mostPassive fund managers just try to copy the All Ordinaries index.Very low fees in return for average returnsExpect All Ordinaries less 0.25% guaranteed

3. 3Entry and exit feesEntry feesNormally up to 4%Paid to financial adviser who sold you the product as a commission.Commsec waives most of these entry fees.Exit feesUsually only if you choose a “no entry” fee option.The entry fee is usually loaded on top of the admin fee for the first five years if you choose “no entry fee”.

4. 4Buy-sell spreadThere is also a different unit price for “buying” versus “selling” units.Buy unit price is higher than sell unit priceThis is supposed to reflect transaction costs and admin costs associated with your transaction.Ranges from 0.3% to 1.0%This is a big cost for buying then selling $100,000Moral … beware of “switching costs” … pick a fund and stick to it.Also note that capital gains are realised when you sell units in a fund which may have tax implications!

5. 5Administration feesCalled the Management Expense Ratio (MER)Normally between 1.4%-2.0% per yearAbout 0.5% paid to adviser as ongoing commissionAbout 0.3% paid to adviser’s head officeThe rest is kept by fund manager

6. 6If you have a lot of moneyWholesale managed funds have MERs of 1% but you need $100,000 to invest.Master trusts and Wrap accounts let you invest in lots of managed funds in the one administration system (convenient). BUT:Pay adviser fee of 0.4%Pay admin fee of about 0.6%Pay wholesale MER of about 1.0%Total of 2.0% per year may be higher than just investing directly in retail.