Sunday, 10 July 2016

High fees dampener for unit trust (2)

Good article in The Star:

Entry fee in Malaysia’s fund management industry among highest in the world

Some snippets (emphasis mine):

The fund management industry in Malaysia has often been criticised for charging their retail clients fees that are deemed too high.

In particular, there is a fee called the entry fee, which at 5% to 6% imposed on total funds invested, is thought to be among the highest in the world.

Some industry players, long worried about the issue which in their view affects the industry’s competitiveness, is suggesting a lowering of this particular fee, said to be used to cover marketing and distributions costs of unit trusts and other investment products.

Areca Capital CEO Danny Wong Teck Meng, for instance, says that his company has always maintained that the prevalent entry fee of 5% to 6% is too high.

“UK and Australia have already banned commissions from entry fees, yet this is still the norm here in Malaysia,” Wong, who helps manage some RM700mil in client funds, tells StarBizWeek.

Entry fees are determined by the market and whatever that is collected is paid out mainly to product distributors (banks, independent financial advisers, platforms) and their agents.

Because of the current high fee structure, Wong feels that this has led to a host of other issues including, “product-pushing” practices as opposed to consultation/advisory selling.

“A lot of times, for certain fund houses, the “advisory” work that should come hand-in-hand in order to justify the high fees, is lacking,” he says.

On top of the entry fees, clients who ask fund managers to help grow their money also pay other indirect fees such as an annual management fee, trustee fees and some even pay financial planner advisory fees which can go up to an annual 2% of the market value of an investor’s portfolio.

All very true, and good that The Star pays attention to this issue, that is very important for people who want to invest in unit trusts.

But ...... all issues have been highlighted before, already in 2011, in an article I wrote about before:

High fees of 5-7% as front end commissions for unit trusts are simply outrageous, you can not expect to make much more than that over a year in the long run given the relatively low Corporate Governance standards in Malaysia, see my previous blog post:

Giving away the gains of one whole year in commissions is therefore utterly ridiculous. If you own a house that you want to rent out, do you give the agent a commission equivalent to one year rental?

The authorities should come down hard on these kind of practices. Fees of 1% (for larger amounts) up to 2% (for smaller amounts) are reasonable.

As long as that has not happened, boycott the ones that charge more, and go for the online portals or the niche operators with the more reasonable fees

In other words, we are almost five years further and nothing has happened. Very disappointing.

For a look at sales practices and what commissions and expenses will do to investment returns (in the US context), please have a look at this book:

"Odds On: The Making of an Evidence-Based Investor"

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