While we often talk about the benefit of lower fees at Netwealth, it may seem like we are banging our own drum. In the interest of transparency, we thought it would be useful to highlight the views from a diverse set of publications to help you form your own opinion on the merits of low fees when investing.
The Citywire columnist David Stevenson talks about the big numbers (“short term moves up and down in the price of shares and bonds”), and the small numbers (“the long-term impacts of costs and inflation”). While he critiques the high fees of a particular company, the article focuses on when we: “add those small numbers up over many decades and they make all the difference” – especially in an era of reduced real equity returns.
While this article focuses on the many challenges facing a popular investment platform, it first does so by highlighting the costs that investors face and how much of a shortfall they could suffer compared to less expensive providers. Again and again the mantra of lower fees is hammered home – with examples – along with a clarion call from financial adviser Justin Modray:
“Fees are a key consideration when investing. Paying too much can potentially wipe thousands off your returns over time. Check how much you are paying and don’t be afraid to move.”
The Money Advice Service immediately gives an illustration showing “How fees stop your money growing” when investing. While the article explains the typical charges and costs that investors may face, it also asserts that paying more for a service doesn’t guarantee better performance:
“Your hope is that a fund that charges higher fees is doing so because it’s confident that it will perform above average, but there’s no real evidence that any fund or fund manager can consistently deliver superior performance.”
This unbiased analysis at Which? states up front that “Over time, fund charges can make a huge difference to your returns.” It then defines the Ongoing Charge Figure (OCF) and lists the various fund charges that investors could face.
This glossary article explains what the Ongoing Charges Figure is in detail. Again, it leads with how important low costs are (“Costs matter in investing”) and reinforces that statement by talking about how even low percentages compound up over time:
“Over decades, we're talking thousands or tens of thousands of pounds of a difference to your pension pot, potentially.”
Although this is an American website, with costs specific to the US market, the lessons are similar to those learned from UK-focused publications. The segment headlined “Why Investing Fees Matter” provides a clear illustration of the difference between paying fees of 0.5% vs 2% over a 25-year period. Further analysis also reveals that time and time again: “Studies have shown that on average, lower-cost funds tend to produce better future results than higher-cost funds.”
This Forbes article doesn’t pull any punches. Again, it is US focused, but the underlying narrative and sums are equally relevant for UK investors. While the example of 9.7% annual returns (data from 1926 to the end of 2019) is unlikely to be regularly attainable in future, it examines the effect of 1% and 2% fees over 40 years.
The piece also asserts that paying high fees do not generate better returns (with supporting statistics): “In defense of fees, some argue that higher fees generate better returns. Studies do not support this conclusion.”
Lower fees matter, but so does value for money
The articles above make a convincing case for the benefits of lower fees. It is hard to find instances where paying much more in fees translates to a better result for investors, yet it does happen – although it is incredibly rare for this to happen consistently, as the selected pieces confirm.
The list of charges for UK investors can be varied, but we cover most of them here. We should also stress, however, that while lower fees matter, equally as important is the value you get when investing.
While it can be relatively inexpensive to invest in an index fund or ETF, how do you decide in which ones to invest and where? What assets should you choose, and in what ratios to allow you to achieve your goals? Which platform should host your investments for you?
By addressing the challenges that DIY investors face, we deliver on our promise of value: making the difficult decisions and actively managing your money efficiently on your behalf, while giving you as much transparency and control as you need.
So while it is true that we do bang our own drum from time to time, most of the evidence suggests, that when it comes to the benefits of lower fees – the clamour is becoming quite deafening.
Please note, the value of your investments can go down as well as up.