You could pay €40k in fund fees - even if you lose money
Getting your head around the charges on investment funds is tricky, but it's important to make sense of them.
You could easily pay €40,000 in charges over 20 years after investing €100,000 – even if your fund loses money. Those investing for longer can expect to pay more. You could lose as much as €120,000 of a €400,000 pension pot to charges, according to a report recently published by the Social Protection Minister, Joan Burton.
As well as the direct financial hit, high charges inhibit the ability of your investment to grow – because the more money in your fund, the better the chance it has to increase in value. So high charges leave you with less money in your fund to work for you. Choose an expensive pension fund and your final pension pot could be worth €82,000 less than a cheaper fund would be.
High fees might be justified if your fund performs really well – but otherwise, you have to question why you're paying them. Even investment funds with average fees can be expensive or poor value for money – particularly if you're losing money because the fund has performed badly.
The Sunday Independent asked top investment advisers to identify funds which they considered to be among the most expensive – or to offer bad value for money.
Friends First Insight
Eats up at least €40,000 in charges over 20 years
The Insight Currency Fund has an annual management charge of 2 per cent. This fee is higher than the industry norm of between 1 and 1.5 per cent. Invest €100,000 in this fund and these charges will clock up to at least €40,000 after 20 years. Furthermore, if the fund performs well, performance fees will eat up a fifth of any annual investment growth over 7 per cent.
One investment adviser, who did not wish to be named, said investors should steer clear of funds "where the fees are high and where the investment returns have under-performed the investment managers' stated objective". "The Insight Currency Fund is small in size, high risk and has failed to perform – it has produced a negative return for the last five years," added the adviser.
The Insight Currency Fund, which invests in currency, dived by almost 18 per cent between late May 2013 and late May 2014. Over the last five years, the fund has made a loss of about 1 per cent a year. By contrast, the Friends First KBI Global High Yield Equity fund has delivered an average annual return of 15.2 per cent over the last five years. However, at 0.85 per cent, the fund management charge on the Global High Yield Equity fund is less than half of that charged on Insight.
"The Insight Currency Fund does have higher charges than funds which give exposure to traditional asset classes. However, it is not trying to do the same thing as these funds," said Simon Hoffman of Friends First. "Currency has had a bad run over the last five years and this fund has had a poor start to the year – but it is a volatile fund."
Irish Life Property
Eats up at least €37,000 in charges over 20 years
Irish Life's Property Portfolio Fund has an annual management charge of 1.85 per cent. Not only is this charge higher than that on many other funds, its long-term performance is poor. Since its launch in March 2006, it has made an average loss of almost 6 per cent a year. Although the fund has performed well over the last year, its average annual return over the last five years has been about 2.6 per cent – you could earn almost as much interest on a good deposit account and you wouldn't have to pay investment charges.
The annual management charges on a €100,000 lump sum could add up to €37,000 over 20 years – or more if the fund performs well.
"Of this €37,000, €15,000 would go to Irish Life Assurance and €22,000 would go to the external international property fund managers," said a spokeswoman for Irish Life. "Given the typical performance of these funds, these fee levels are very competitive. The annual management charge reflects the extra costs involved in managing and trading property investments."
Bank of Ireland Life Alternative Energy Fund
Eats up at least €35,000 in charges over 20 years
Invest a lump sum in the Alternative Energy Fund and you'll be charged an annual management fee of 1.75 per cent. Although this fee is higher than the norm, the fund has performed dismally over the last few years.
Over the last five years, the fund, which invests in alternative energy companies, made an average loss of 2 per cent a year. In 2011, the fund dived by 30 per cent; in 2010, the fund made a loss of 13 per cent.
If you invest €100,000 in the Alternative Energy Fund, the annual management fee could eat up about €35,000 of your original investment over 20 years.
Bernard Walsh, head of pensions and investments with Bank of Ireland, described the fund as "a tiny specialist fund".
Bank of Ireland Life Cash Fund (Pensions)
Eats up about €20,000 in charges over 20 years
At 1 per cent, the annual management charge on the Life Cash Fund (Pensions) is about average. However, the woeful performance of this fund begs the question as to whether there should be any fee at all.
Between early June 2009 and early June 2014, this fund delivered an average return of about 0.7 per cent a year. Over the last 10 years, the average annual return on the fund was 1.9 per cent. At 0.1 per cent, it has hardly made a return at all over the last year.
Despite this, you pay an annual management fee of 1 per cent. This could add up to €20,000 in charges over 20 years – if you invest a lump sum of €100,000. You would make a better return by leaving your money in an ordinary deposit account, where it won't be hit for charges. KBC Bank, for example, pays 2 per cent interest a year on its demand deposit account.
"Bank of Ireland's fees are very much in line with the market norm," said a spokeswoman for Bank of Ireland.
Irish Life Clear PRSA
Charges reduce the value of pension fund by almost €70,000
As well as charging an annual management fee of 1 per cent a year, Irish Life has a contribution charge each time an investor saves money into this fund. The contribution charge is 3.5 per cent in the first five years, and 3 per cent thereafter.
A 25-year-old man who contributes €12,000 a year into this PRSA for 40 years would pay €27,463 in contribution charges alone, according to Irish Life. These charges would reduce the value of his pension fund by almost €68,880 by the time he reaches 65, assuming the PRSA delivers an annual investment return of 6 per cent and the investor increases their contributions by 3 per cent a year.
Charges reduce the value of a pension fund by up to €81,470
Some companies charge contribution fees of as much as 5 per cent, or more, on standard PRSAs. These fees add up.
For example, let's say you're a 25-year-old who pays €1,000 a month into a PRSA and you're hit with a 5 per cent entry charge each time. By the time you're 65, those entry charges could have reduced the value of your fund by as much as €81,470 – assuming your PRSA delivers a return of about 6 per cent a year and you increase your contributions by 3 per cent a year.
Don't get caught by charges on your fund
THE main charges on investment funds include annual management fees (charged for the management of money in your fund), entry fees (charged each time you save money into your investment), and exit fees (which kick in when you cash in your investment).
There are also hidden fees. "There's a lot of costs buried in investment funds, such as performance fees and transaction fees," said one Dublin investment adviser.
Performance fees are generally charged if your fund performs well. Transaction fees are trading expenses charged to an investor when buying or selling shares of stocks, mutual funds and Exchange Traded Funds.
Watch out for ongoing adviser charges, which cover regular advice about investment, quarterly updates and so on.
"If you are paying ongoing adviser charges and getting no advice or value add, you should either move to an adviser who will provide this service, or if you don't want any ongoing advice, don't pay for it," said Vincent Digby, of financial advisers Impartial.
Watch out for entry charges – also known as allocation rates. They determine how much of the money you pay into a fund is invested. Choose a fund which doesn't have entry charges – or which offers as close to a 100pc net allocation rate as possible. That way, your investment manager won't get to pocket a slice of your monthly savings or one-off lump sum before the money even goes into your investment fund.
Sunday Indo Business