"If fees consume more than 1% of your assets annually, you should probably shop for another advisor."
- The Intelligent Investor (1949) by Benjamin Graham, Warren Buffett's professor and mentor
Are you overpaying? High fees eat into your investment returns
Time and time again, fees have been proven to be one of the key determinants of long-term returns. In fact, Morningstar research has shown that fund fees are proven the best predictor of fund returns, pointing investors to better outcomes and load-adjusted returns.
Yet, most investors are surprisingly clueless on how much in fees they pay on investment products that over the long run could amount to hundreds of thousands of dollars. Can you think of any other products or services where you have no idea what they cost?
Fees can vary greatly between different mutual funds or unit trusts, different share-classes of the same funds, or even buying the same fund via different banks or brokers. Bottom line is: You can't control where the markets go, but you can control how much you pay in fees.
A $100,000 investment in a fund earning 7% per annum (a good return), but with a fee of 1.75% versus 0.75%, will deprive you of about 152% in returns (or $152,000) over 30 years.
A list of potential fees when investing in mutual funds in Hong Kong
Here are some common types of fees that investors should look out for when investing in unit trusts or mutual funds in Hong Kong:
Subscription Fee
Typically 1.5% -5% in Hong Kong
Subscription fee (also called Front load fee, Upfront fee, Front-end sales load or Initial sales charge), is a fee payable by you to the bank, financial advisor or broker selling the fund. This is charged as a percentage of your investment amount and should be negotiated.
Platform Fee
Typically 0.2-2% p.a. in Hong Kong
Platform fees, or account fees, are generally charged by online platforms and increasingly by banks and other financial advisors for administration of your investments and use of their platform. This is charged as a percentage of the market value of your portfolio, which may or may not also cover trading costs within the account, investment advice and other investment services. Make sure you know what you are getting for the wrap fee, and do not have to pay other fees on top that you thought were included.
Switch Fee
Typically 0.5-1% of your investment amount in Hong Kong
Fee charged when you switch from one fund to another. This is common when you invest in mutual funds via banks. You really should not have to pay this, ever.
Redemption Fee
Typically 1-5% of your investment amount in Hong Kong
Fee payable whenever you sell or redeem a fund. Some funds progressively reduce the redemption fee if you hold your investment over a longer period of time. Also less common these days, but still exists for some retail investment products.
Expense Ratio, Ongoing Charges or Management Fee
Typically 1-3% p.a. for retail share classes available in Hong Kong
An annual fee the funds will charge for fund expenses, including management fees, administrative fees, and operating costs. Smaller funds typically charge a significantly higher total expense ratio as they do not enjoy the same economies of scale as bigger funds.
This is deducted from a fund's net asset value (NAV), and accrued on a daily basis.
This is the only fee that institutional investors pay, and it is typically a fraction of what retail investors pay. For example, the same fund with both institutional and retail share classes will charge institutional investors ~0.50% and retail investors anywhere between 1-3%.
Trailer Fee
Typically 50-60% of the fund’s expense ratio in Hong Kong
This is a scary one. The elusive recurring distribution commission is paid by the fund management company to the bank, financial advisor or broker that sold you the fund. This fee is paid as long as you hold the fund in your portfolio. This means that you're not able to see this fee directly - you will only see it as a reduction in the net asset value (NAV) of the fund and as some part of the expense ratio the fund manager is charging you.
You can read more about trailer fees in our article.
Low, fair fees with Endowus — keep more of your returns
Fees are important to your investment returns. On Endowus, individuals get institutional access to high-performing funds at significantly lower, fair, and transparent fees.
The all-in Endowus Fee is a per-annum fee based on the value of assets you hold with Endowus. We do not charge a sales fee, transaction fee, or any other hidden fees, unlike other platforms. You also get 100% Cashback on all commissions, known as trailer fees — we have returned more than US$4.5 million in these fund-distributor commissions (as of January 2023) to our Singapore clients since inception.
Endowus is an independent wealth advisor paid solely by its clients, which ensures our advice is unaffected by any conflicts of interest. Unlike other platforms, we do not collect trailer fees, which eat into your returns and wrongly incentivise other advisors and platforms to sell certain funds that may not be suitable for you. This reduces our costs to a fraction of the industry average, which then translates to better returns for you in the long term.
For more information on our transparent fee structure, click here. To get started with Endowus HK today, follow this link.
Read more:
- Choosing Endowus when investing in Hong Kong
- Why investing in Hong Kong shouldn't be expensive
- Wealth management conflicts of interest are failing investors. Here’s what’s needed
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Risk Warnings
Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down.
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