Clients commonly fixate on fees in investment funds. But is this truly the best approach?
💡 Focusing on fees is necessary, but they don’t tell the whole story. Performance, investment strategy, and long-term goals are equally crucial. Fees are just one piece of the puzzle for successful investing. Ignoring other vital factors can lead to suboptimal decisions that might not align with the client’s financial aspirations.
📊 As financial professionals, we have a crucial role in educating our clients about the bigger picture. We should empower them to adopt a holistic approach that goes beyond just fees and considers the overall value of their investments. This includes understanding how different investment strategies affect performance over time, aligning investments with personal goals, and being aware of market trends and economic factors that can impact returns.
📚 Fostering a culture of financial literacy is not just essential; it’s a commitment. By empowering our clients with the knowledge they need to make informed decisions, we can help them optimise their wealth over the long run. Financial literacy is not just about understanding numbers; it’s about comprehending the principles and strategies that lead to sustainable economic growth.
🎯 In the end, our goal should be to help clients achieve their long-term financial objectives. This requires a balanced view that considers fees and places significant emphasis on performance, strategy, and goals. By doing so, we can help our clients make decisions that truly benefit them in the long run.
🤝 Let’s work together to promote this comprehensive approach and ensure our clients are well-equipped to navigate the complexities of the investment world.
Why fees still matter
Costs compound just like returns. Take a CHF 1,000,000 portfolio held for 20 years:
| Net return per year | Value after 20 years |
|---|---|
| 5.0% | CHF 2,653,000 |
| 4.0% | CHF 2,191,000 |
One percentage point of cost costs about CHF 462,000 over 20 years. So the question is not whether fees matter, but whether a fund earns them.
The TER is only part of the cost
The total expense ratio (TER) covers the fund’s management and running costs. It does not include everything the investor pays:
- Transaction costs inside the fund, which rise with portfolio turnover.
- Performance fees, charged on top in some funds.
- Entry and exit charges, and bid–ask spreads when the fund is bought or sold.
- Custody and brokerage fees at the client’s bank.
A fund with a low TER but high turnover can cost more in the end than one with a slightly higher TER.
Retrocessions and share classes
Many funds offer several share classes of the same portfolio with different fees. Classes that pay distribution fees (retrocessions) to the bank or adviser are more expensive for the client. Swiss case law has long held that such payments belong to the client unless the client has knowingly waived them. Under the Financial Services Act, they must be disclosed.
Independent wealth managers can often use “clean” share classes without distribution fees. Ask which class you are invested in, and whether any payments flow to your adviser.
Five questions that go beyond fees
- How did the fund perform after all costs against a relevant benchmark over five and ten years?
- Is the strategy clear and consistent, or does it change with market fashion?
- What role does the fund play in the overall portfolio?
- Is there a cheaper share class or an index alternative for the same exposure?
- Who receives any retrocessions, and are they passed on to me?
Read also: TER Is Just the Tip of the Iceberg · Private Banking Fees in Switzerland
Source: LinkedIn
