Private pension

The lower the cost, the higher the return

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Author
Simon Herzer
1 min read

It’s a simple calculation: at the end of the day, lower investment costs result in higher returns. This is why it is worth taking a closer look at the fees and costs associated with the individual investment products.

Let’s start with a simple example: We invest CHF 100,000 in two equity funds which both generate an average gross return of 6% a year. Fees for the first equity fund amount to 1.5% p.a. and for the second one to 0.7% – just below half. After a period of 20 years, the difference in returns after deduction of costs is close to CHF 40,000. In other words: Investors who choose the more expensive fund need to generate an additional return of CHF 40,000 simply to compensate for the additional costs they incur compared to the lower-priced fund.

TER is the generally accepted reference figure

How does one find out how expensive a fund really is? The reference figure commonly used in the financial industry is the “total expense ratio” (TER), which expresses a fund’s operating costs as a percentage of its assets. The figure includes the fee incurred for the management and custody of the assets, distribution costs and further expenses, for instance audits. The TER is specified in the key investor information document (KIID) which is available to all investors.

TER does not contain all costs

In the case of investment funds, the “total expense” does not cover all costs. For instance, it does not include the transaction costs that arise on the purchase and sale of securities. In addition, fund subscription is often subject to a front-end load which is also not included in the TER. Aside from covering the anti-dilution levy incorporated in the costs of the securities purchase transaction, this commission often includes additional compensation for the management company.

Total cost comparison is essential

Although the cost incurred for the custody of the fund securities is included in the TER, banks often charge an additional fee for the custody of the fund on the investor's securities account. Further costs may arise for the monitoring and management of portfolios that consist of several investment products. Hence, any comparison, even between traditional investment funds and ETFs (exchange-traded funds), which are marketed as particularly inexpensive products, should always include all costs in the overall assessment.

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Author
Simon Herzer
Project Manager Communications