Retail fees down, but investors still charged up

THE FEES charged to investors in the retail managed fund market have fallen steadily over the last six years, a new study by the Investment and Financial Services Association (IFSA) has claimed.

The study, released last week, found that on average across all asset classes the Management Expense Ratio (MER) of retail managed funds, which comprises both investment management and administration charges, fell from 1.53 per cent in 1996, to 1.50 in 1999, to 1.46 per cent by the end of 2001.

According to IFSA chief executive Lynn Ralph, the seven basis point decrease between 1996 and 2001 translates to a total cost saving for investors of approximately $71.7 million.

However, the study, conducted by KPMG on behalf of IFSA, also found there was a considerable spread between the MERs charged by retail funds across different asset classes.

The study found the average passively managed Australian share fund charges an MER of 1.13 per cent, while active Australian share funds charge 1.81 per cent, international share funds 1.91 per cent and domestic bond funds 1.44 per cent.

According to the report, the most expensive funds were in fact diversified funds, with both growth oriented and balanced diversified products charging an average MER of 1.88 per cent.

As well as the analysis of MERs, the IFSA study also examined the distribution or up-front entry fees charged by retail managed fund providers.

The study found that the range of up front fees charged in the retail managed fund industry have changed from the typical four to five per cent levied in 1996, to zero to five per cent in 2001.

The difference is largely the result of a widespread change in the standard fee structure of retail managed fund providers, with many adopting nil or low entry fee arrangements where up-front fees are replaced with a trail fee over the life of an investment.

The study found where such ‘dial-up’ options are offered, investors will usually pay a higher MER than if they had paid an up front entry fee, although the difference in price was generally equivalent to the up-front fee itself.

According to the report, the trail fee paid by investors who choose a nil or low entry fee option generally ranges between 0.33 per cent and 0.60 per cent, with the average being 0.44 per cent.

Ralph says the study proved once again that fees in the retail managed funds sector were moving in a positive direction, particularly given that the period examined included the introduction of the GST.

According to the report, the majority of retail managed fund providers expected their MERs to increase by approximately 2.5 per cent as a result of the GST.

However, from 2000 to 2001, the period when the GST was rolled out, MERs actually fell by one basis point.

“Even with the added compliance costs associated with the introduction of the GST, the industry has continued to deliver significant cost savings,” Ralph says.

“This is good news for all Australian investors, particularly in this climate of lower investment returns.”

But the release of the report coincides with growing calls for fees in the managed fund sector, particularly in relation to superannuation products, to fall even further.

Australian Council of Social Services (ACOSS) president Michael Raper told a hearing of the Senate Select Committee on Superannuation last week that retirees would not accumulate adequate retirement incomes unless fees and charges were limited to around one per cent.

Australian Consumers’ Association (ACA) finance policy officer Catherine Wolthuizen, also appearing at the Senate committee hearing, said the fees charged by the retail managed fund sector were still a concern.

She said that a typical consumer could have their retirement nest egg reduced by around 20 per cent by choosing a high cost retail superannuation product over other cheaper products.