How to compare investment fees
Investors are becoming increasingly aware of the (catastrophic) effect that high investment fees can have on their retirement lump sum. But this knowledge leads to the next important question: How do we best compare investment fees across products?
To answer this accurately, savvy investors will need to become acquainted with something called the total expense ratio (TER).
Never heard of it? Don’t worry, you’re in good company. Ben Collins who writes a blog at stealthywealth.co.za and uses a pseudonym when speaking publicly, explains what it is.
“The TER represents the cost of running the unit trust or exchange-traded fund (ETF), and includes things like the annual management fee and administrative costs. It is calculated as the total management and administrative cost, divided by the total size of the fund and then expressed as a percentage,” he tells the Mail & Guardian.
Mike Brown, managing director of etfSA.co.za, further details what the calculation includes.
“These measured expenses include asset management and administration fees, custody costs, trustee fees, audit fees, bank charges, taxes, interest rate charges, costs of buying and selling units from investors and scrip [securities] lending costs,” he writes in a published statement.
Collective investment scheme (CIS) funds —such as unit trusts —also have a management charge, which goes to the fund manager to cover the costs of marketing, advertising, staff overheads, and so forth, Brown explains. “These are included in the TER,” he says. “Performance fees, which are charged by an increasing number of actively managed funds, must also be included in TERs. This also applies to multitiered funds —such as fund of funds, white label funds —where performance fees may be deducted at different levels of fund management.”…
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