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While the level of returns achieved by your managed fund is vital, there is evidence that fees are having a substantial impact on returns. It has been suggested that as much as a third of returns are ripped out by way of fees, costs, expenses and a miscellany of charges. This of course may well be the case where returns are low and in many cases fees will take an otherwise positive return into negative territory. So be wary of the level of fees.
Managed fund fees - the bad news
It is currently very difficult for the investor to find and understand managed fund fees, despite a requirement they be identified in investment statements. There is no consistent presentation and no ability to compare fees charged between funds.
Fees that can be charged by a managed fund include:
Adviser fees – this is the initial fee that an adviser may charge to recommend a fund. It can be a percentage of the investment or it could be a flat fee.
Provider Fees – these may include if applicable:
Monthly Member fees
Fund fees - these may include if applicable:
Annual Management fees
Operating and Administration Expenses
Underlying Fund TERs
Note that you may also be charged for transactions such as the purchase and sale of securities. There may well be other fees, costs or expenses that are not included above.
Investment statements - not an easy read
Fees and costs are supposed to be disclosed clearly in NZ Investment statements. But Investment Statements, like Product Disclosure Statements in Australia, are presented so as to protect the issuer from liability. Little thought is given to the reader.
Investment statements fail to provide a straightforward and reliable means of assessing the merits of a fund and comparing it with others. Indeed it almost seems as if the issuer, by presenting huge amounts of tortuous legalese, seeks to discourage the reader. Certainly discourage the reader from making the effort necessary to discover exactly what the fees are, if that were possible.
The questions that have to be answered in the Investment Statement are:
What sort of investment is this?
Who is involved in providing it for me?
How much do I have to pay?
What are the charges?
What returns will I get? What are my risks?
Can the investment be altered?
How do I cash in my investment?
Who do I contact with enquiries about my investment?
Is there anyone to whom I can complain if I have problems with the investment?
What other information can I obtain about this investment?
In our opinion no more than ten pages should suffice to give a prospective investor the good oil. There should be a standard presentation of all fees and costs in every Investment Statement. (We note that as of June 2012, the Financial Markets Authority has issued guidance on improving the effectiveness of Investment Statements. It remains to be seen whether guidance will make a difference or whether it will not require significant changes to the law.)
For the meantime we can only suggest that you at least examine these documents and seek clarification from your adviser where necessary.