The average managed fund has underperformed the benchmark ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past twelve months, confirming our views that most active fund managers don't do the job they receive hundreds of thousands of dollars in fees for.
According to asset consultant, Mercer, the median fund manager returned 20.4% for the twelve months to the end of March 2013. Now that's a fantastic return by anyone's measure. The problem is that the index also delivered a fantastic return of 19.7%, and after taking out manager's fees, the index was the better performer. A simple investment in an exchange traded index fund (ETF) would've beaten most managers.
Rainmaker's annual fee study of 500 managed funds show that Australians pay $20 billion in super fees a year, or $17 billion excluding insurance premiums. That's for superannuation funds and doesn't appear to include normal managed funds.
That is more than likely to rise too, as most funds charge a percentage of the account balance, rather than reflecting the cost of administering the fund. With the super guarantee levy set to rise from 9% to 12% over the coming years, fund managers are set to reap windfall gains, without having to lift a finger.
Research by ING Direct shows that in a worst case scenario, one third of the money you make during your career goes towards paying fees, with estimates ranging between $118,000 and $174,000 in total fees over your working life. It doesn't end there either, with more fees due every year in retirement, if your funds are held in a managed fund.
ING Direct's Head of superannuation Michael Christofides says "Too many Australians are getting ripped off when it comes to fees." He added, "Unfortunately, too many Australians don't take enough of an interest in their super. Most people don't know what their balance is – and a lot of people don't know how much fees they pay."
According to Morningstar data, the big four banks are amongst the largest fund managers, as well as Macquarie Group (ASX: MQG), AMP Limited (ASX: AMP) and BT Investment Management (ASX: BTT) – which is majority owned by Westpac Banking Corporation.
Foolish takeaway
Investors in managed funds or superannuation funds might want to take some time to find out exactly how much they are paying in fees, including those to financial advisers, and what their manager's performance has been like compared to the index. It might be time to consider other cheaper alternatives and not be ripped-off.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.
