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 amounts to 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. The harder question is how carefully the fund was chosen in the first place. Thirty minutes is the usual answer, and it should not be: notes on fund selection from the Citywire Zurich Forum.
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?
Active or passive: when higher fees can be worth it
Index funds and ETFs are the cheapest way to capture a market. Active funds charge more because they try to beat it. That premium is justified only in specific cases:
- Less efficient markets, such as small caps, emerging markets or some bond segments, where research can still add value.
- Risk management, when a manager reliably limits drawdowns and the client values a smoother ride.
- Access, for strategies an index cannot replicate, such as private debt or specialised credit.
In large, liquid markets like US or Swiss large caps, most active funds struggle to beat their benchmark after costs over long periods. There, a low-cost index solution is usually the better starting point.
How to read a fund factsheet in five minutes
- Benchmark: Is it the right one? A global equity fund should not be compared with a Swiss index.
- Performance after costs: Look at five and ten years, not only the last twelve months.
- TER and share class: Check the exact class you hold and whether a cheaper one exists.
- Turnover: High turnover means higher hidden transaction costs.
- Size and age: Very small or very young funds carry closure risk.
Frequently asked questions
What is a good TER for an equity fund?
It depends on the strategy. Broad index ETFs often cost well below 0.3% a year; active equity funds typically cost more. What matters is the return after all costs.
Are retrocessions still paid in Switzerland?
They can be, but they must be disclosed, and they belong to the client unless the client has knowingly waived them.
Should I switch to a cheaper share class?
Often yes, if the portfolio is identical. Check transaction costs and tax effects of the switch first.
Read also: TER Is Just the Tip of the Iceberg · Private Banking Fees in Switzerland
Source: LinkedIn
Curious what fees mean for your overall setup? Compare the totals with our private banking vs independent wealth management fee calculator.
Over long periods even small annual costs change the end result dramatically — our compound returns calculator lets you see the effect in numbers.
Source: https://vapa.ch/investment-funds-fees/ · vapa.ch
