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How useful is looking through?

By NAB Asset Management

Increased transparency on fees is the latest in a spate of legislative changes impacting how Australians save for retirement. Regulations coming into play in 2017 are noble in their intent but they could draw investors into making investment decisions based on cost alone. Investment returns need to help investors reach their financial objectives, and while transparency for investors is to be encouraged, the cheapest options aren’t always going to deliver.

New fee and cost disclosures aim to improve visibility of underlying fees that are charged by fund managers. Fees on alternative asset classes and derivatives are some examples. Regulators want fee disclosure to be consistent across the entire industry so investors are able to do an ‘apples to apples’ comparison of fees. The expectation is that better informed investors are able to choose better investment solutions. As with all well-intended legislative changes, investors need to ensure they don’t allow an abundance of information to lead them inadvertently into poor investment decisions.

Our brains are wired to use simple short-cuts to make most decisions in life.1 Given a choice between a lot of information and simple summaries, most people prefer simplicity when making an active choice. In this ‘automatic decision mode’, most investors are likely to choose ‘fees’ as a simple mental heuristic to make decisions around which investment choice is best for them – and the lower, the better, right? While keeping fees low is an important consideration in any investment strategy, the most important decision is how best to spend your limited fee budget.

Just as not all expensive investments are appropriate, the cheapest are not always ideal either. Firstly investors should understand that the new disclosure requirements simply provide a clear breakdown of the fees and costs they have been paying all along. These fees are potentially neither new, nor an increase to what has been charged previously. Secondly, some of the strategies which investors get access to as a result of paying more fees (like private equity) have come in handy delivering returns (net of fees) when more traditional assets (like shares and bonds) have struggled to deliver returns in difficult market environments.

These new disclosures may cause confusion, indecision, or regret for some investors. These are natural reactions to new information. However, the confluence of these emotions may lead many investors into using ‘price’ alone to judge ‘value’. We see similar behaviour from investors focusing on recent returns to make investment decisions – Dalbar’s research shows consistent wealth destruction from these behaviours.2

As investment managers, we know that return and risk expectations are also important considerations in delivering investment objectives. There is no value investing in assets that have low fees if they can’t deliver the return or risk characteristics required to achieve those objectives. Fees are always a consideration when choosing investments, because strategies are designed to deliver benefits to investors, net of fees.

A better approach for investors when evaluating fees and costs may be to construct a checklist of what different funds offer, and consider whether expensive strategies are simply about price or if they actually offer something more personal, that’s hard to quantify, but helps you sleep at night.

As a result of the new fee and cost disclosure investors will be in a better position to understand the fees they pay and they’ll be able to more easily compare them across funds. We suggest you use this fee disclosure to question whether your fee budget is being wisely spent.


1 ‘Judgments under uncertainty: heuristics and biases’ Tversky A and Kahneman D, Science, 1974 and ‘The effect of imagining an event on expectations for the event: an interpretation in terms of the availability heuristic’, Carroll J, Journal of Experimental Social Psychology. 14 (1), 1978.

2 ‘Quantitative analysis of investor behaviour,’ Dalbar, 2016.

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