These are the fees you pay when buying funds

INVESTORS in Singapore may be paying more in fees than they realise. New online distribution channels have set up shop in recent years, and robo-advisers claim their users are charged lower fees. But research shows fees are higher than in other markets, and a survey of the local market suggests investors may not be aware of the best bargains.

Morningstar’s biannual Global Investor Experience report, which grades the experiences of mutual fund investors across 26 markets, gave Singapore a “below average” grade in its fees and expenses scorecard.

Other Asian markets that also scored below average include Hong Kong and China.

The top markets were Australia, Netherlands and the United States. Among the other Asian markets scored, Korea was graded “above average”; India, Japan and Thailand “average”; and Taiwan “bottom”.

Commenting on the fees, Morningstar said: “Disappointingly, these are almost unchanged since our 2019 study.”

Investors also may not be aware of all the various fees they are subject to, particularly because new fee models are emerging. These fee structures have confused at least one reader, who reached out to The Business Times to seek clarification of how they work.

The different fees and charges an investor might face include:

• Annual fees: This is a fee typically levied by robo-advisers for their portfolio products, and is a percentage of the total assets being held by an investor on a robo-adviser’s platform.
• Sales charges: This is a one-time upfront fee that banks usually charge for buying unit trusts, and is typically a percentage of the amount being invested.
• Platform fees: What robo-advisers call annual fees, the self-service financial platforms call platform fees. This is also a percentage of the total assets held by an investor on the platform.
• Fund management fees: These are fees taken by the fund managers to actively manage the fund, and are usually deducted from the net asset value of the fund. These fees may not be immediately visible because investors do not pay them, but they are typically disclosed in documents about the fund.
• Trailer Fees: A subset of fund management fees, trailer fees (also known as retrocession fees) are paid by fund managers to the distributors that sell the funds. They would typically be a percentage of the fund management fees that the fund collects.

BT collated fees charged by various popular fund sales platforms, including robo-advisers, for comparison.

It is difficult to draw direct comparisons, as each channel comes with its own terms and conditions.

For instance, buying a unit trust from a bank without passing the customer knowledge assessment would require investors to first go through a session with a personal financial consultant. This could result in an even higher sales charge – of up to 5 per cent of the invested amount at OCBC.

Nevertheless, investors should be aware that the seemingly low fees charged by robo-advisers are not necessarily the best deal.

Self-serve platforms FundSupermart (owned by Ifast Corp) and DollarDex (owned by Singlife with Aviva) actually charge the lowest fees. DollarDex, in particular, stands out as it only takes the trailer fees paid by the fund manager.

The main difference between these platforms and robo-advisers is that investors would have to do their own research on what kind of portfolio they are looking to build and buy the individual funds themselves. Portfolio rebalancing would also have to be done by the individual.

The experience of each individual will vary depending on circumstances. For illustration, we assume an annual investment of S$10,000 in equity funds for three years. The portfolio grows at 11 per cent per annum, which is roughly the average annual return of the MSCI World Index since 1978. That means, assets under management are worth S$21,100 at the start of year two and S$33,421 at the start of year three.

Endowus says it returns all trailer fees to customers, but this rebate is not reflected in the table because not all funds pay trailer fees. The equity funds in Endowus’ flagship portfolio, for instance, do not pay such fees, according to their prospectuses available on Endowus’ website.

BT’s calculations show that depending on the growth of your portfolio and the amount you are investing, robo-advisers may be an expensive proposition. The counter-argument is that the robo-advisers help you select low-cost funds that could outperform any funds you select and buy through self-serve online platforms or at banks.

Investors should, of course, decide for themselves what works best for their individual circumstances and abilities.