Low Fees Are Very Important

A lot of investors do not thoroughly assess all the fees they are being charged around their investment management services. Alternatively they simply accept the fee structure with the assumption that if it wasn’t fair others wouldn’t be paying it either. All investment management services have associated fees, but it is extremely important that investors ensure they are not over paying.

The reason fees are so important is that fee levels can dramatically reduce an investor’s return over time, and are one predictor of future returns that investors do have full control over. As an example, assume $100,000 is invested for 25 years and earns 7.5% pa before fees. If the fee level is 2.0% pa, the investment accumulates to $381,339 over the investment period. However, if the fee level is reduced to 1.0% pa, the investment accumulates to $482,770. The 1.0% pa difference in lower fees results in the investor being $101,431 better off. A benefit greater than that of the entire initial investment!

This dramatic difference is due to the compounding effect, and becomes even more dramatic if performance fees and layers of fees are considered. Performance fees might pay for themselves to the upside (assuming a fair hurdle rate); however they are asymmetric and offer no rebates on the downside and in some instances are re-based so that the investor doesn’t even win back foregone performance before paying out more in performance fees. Additionally, don’t underestimate the impact that layered fee structures have on returns.

Imagine the 25-year fee impact if you were paying an adviser, who simply selected funds, and a lot of these funds had performance fee structures. Assuming two layers of fees, and assuming half the funds outperform (requiring performance fees payments) while the other half underperform; the compounded impact of the total fees paid would be a detrimental drag on returns.

The positive news for investors is that there has been significant and consistent fee pressure on the investment industry post the global financial crisis. As a result it is critical that investors thoroughly assess what they are being charged to ensure they’re not still paying fees based on yesterday’s inflated fee structures.

At Adansonia we believe that in achieving the best returns for clients low fees are essential and so we aim to be highly competitive on fees. We do not charge performance fees, entry fees or exit fees.