There are four things in life you can never get away from – death, taxes, fees and Cher. And fees are especially prominent in the stock market. These fees typically cover the administrative costs of running the investment, such as management, recordkeeping, custodial services and legal fees such as auditing. These are the general fees that you will be paying, followed by the hidden and secret ones.
Investing can be a powerful tool for building wealth – and is necessary for long-term financial well-being. Whether investing in a company, rental property or shares/funds, you need to do something. In the realm of the stock market, there are fees – some secret – and some not-so-secret – that erode investment returns.
I did a comparison of brokerages and their fees in South Africa in the linked article, however, in this article I want to unpack the the fees as a whole, and not just the buy and sell fees.
Let’s chat about those secret and not-so-secret fees.
Fee Impact on managed funds
Fees have a major impact on your investment returns. As many fees are paid as a percentage of the entire fund value, it compounds year after year. It makes brokers, fund managers and financial advisors very happy but leaves you with diminished returns. The best example is Assets Under Management (AUM). A financial advisor invests your money and will charge a fee for all the assets managed. The traditional model is a percentage of every Rand they manage. this ranges from as little as 0.5% to 3.5%. The mean is just over 1%.
Let’s use the example of R2 million invested and a 1% AUM fee. We will assume that this is a once-off amount, and no other payments were made. You’ll pay R20,000 per year (R2 million x 1%) in AUM fees.
This fee excludes other fees such as fund fees, platform fees and brokerage fees.
Investing in the stock market – fees
You should know about these fees, but let’s run through them before we get into the juicy ones
- Platform Fees: These fees are charged by some investment platforms for access and account maintenance, often on a monthly or annual basis.
- Brokerage/Trading Fees: A percentage is often charged each time you buy or sell an investment. A minimum trade amount may also be required in addition to the percentage fee.
- Transfer Fees: This is a charge that may be imposed when transferring shares from one platform to another.
- Administration Fees: These fees may apply to tasks like deposits, withdrawals, or account transfers between providers, and other operational costs.
- Asset Under Management (AUM) Fees: This fee is a percentage of the total value of your investment holdings and is charged for managing your portfolio. It’s important to be aware that some brokers may require you to use their management services, which come with these AUM fees.
- Advice fees – your financial advisor might give you advice on what he will invest your money into. Most people just want to be told what to invest in, without doing their own research.
Hidden or secret fees when investing
Spread: A Hidden Cost in Trading
There will always be a difference between the buy and the sell price, whether buying or selling property, stocks, crypto or forex. Putting this into financial terms, the difference between the ask price and bid price is called the spread.
When investing through a financial advisor, you hand your money over and they buy the requested investment. But do you really know how much commission is being added when you buy? Is it just a flat percentage such as EasyEquities (0.25%)? Could the spread be bloated and you’re paying a lot more commission?
If you’re dealing in forex (e.g. buying Dollars), the commission is often hidden because it’s embedded in the quoted price. Spreads are particularly relevant in actively traded investments like stocks and ETFs, where frequent buying and selling can magnify their impact.
Other fees to be aware of
Here are some more fees to be aware of:
- Selling – When selling your investment, there might be a charge levied for the transaction.
- Cash-out transaction fee – EasyEquities charges a R 150 cash withdrawal fee.
- Forex fees – If you convert your ZAR into USD, a fee will be payable. If you’re investing in an ETF such as Sygnia S&P500, they will internally handle the forex conversion charges. If you’re investing in the Vanguard S&P500, you will need to convert your ZAR into USD first. On EasyEquities, a fee of 0.5% will be levied.
Tax as a form of fees
Anything that eats into your investment returns is bad – even tax. I know in reality that tax isn’t a fee, but it’s nonetheless, it has devastating effects on your investments. For SARS, your investment intention determines the type of tax you will pay. If you are day trading, it is seen as normal income, which will be taxed at your normal PAYE tax rate.
Capital gains tax (CGT) will be payable if the intention is long-term investing. The calculation works something like this: There is an exclusion rate of R 40 000 per year that is tax-free. 40% of the proceeds after the exclusion is taxable at your normal tax rate. This means, in short, that you should not be paying more than 20% of your profits to tax – which is still a lot.
Conclusion
Be a Fee-Savvy Investor – know what fees you’ll be paying and the impact if will have on your investment returns.
Don’t let hidden fees steal your hard-earned returns.
SARS wants you to invest for the long run – and will reward you with lower taxes (CGT), rather than PAYE. If you want to keep fees as low as possible, you shouldn’t be buying and selling the whole time, as the spread, buying and selling fees and other charges will eat into your investment returns.
To minimise my fees personally, I enjoy Exchange Traded Funds as they (depending on the ETF), can be well diversified and low in fees. I also have some single shares, but this can be risky for the inexperienced investor.
Happy investing!