Fees: regular readers will know I hate them. Not the fact that they exist – paying for a professional service is entirely reasonable – after all, I happily pay the plumber and dentist, but what I dislike is how they are charged and their exorbitant rates.
In this edition I want to focus on a fee that is mostly overlooked and patently unfair – platform fees.
Somehow the global financial services industry has got away with charging a percentage-based platform fee, calculated on the value of your investment portfolio. So as your investment portfolio grows, so does your platform fee.
Admittedly, many platforms will reduce the percentage rate as the value increases, but the question is simple: Does it really cost more for them to hold a record of a R50 000 portfolio than it does to hold a record of a R20 000 portfolio?
Both portfolios are just entries on a database; entries that cost exactly the same regardless of how much money the entry may be for.
The reality is that the cost is fairly fixed, and investment platforms should be charging a flat fee.
If they want, they could charge a flat fee per item invested, say for example a fee per share I hold – that would work. But a flat fee really makes sense, anything else looks like a rip-off.
When I proposed this on Twitter, people jumped on me and told me it was impossible. But it is not only possible, it happens on most do-it-yourself stockbroker accounts. I have one stockbroker account that has a platform fee of zero.
In truth, it is an account consisting only of exchange-traded funds (ETFs), and the platform’s owners are certainly hoping that I will use some of their other products as they’re not making any money off me trading ETFs in their account.
But even my primary stockbroker account, in which I hold my tax-free account, share portfolio and trade All Share Index futures, charges me a flat monthly admin fee for the platform, and this includes limited live prices, research, educational events and more.
So regardless of how much my portfolio is worth, I pay the same flat fee. Furthermore, somebody with a much larger or a much smaller portfolio also pays the same flat monthly fee.
Yet my retirement annuity has a platform fee that is a percentage of the value of the portfolio. This is my most inactive account – I never change anything and never even bother to log in, just checking the quarterly statement.
Yet here they are charging me a percentage of the portfolio, and while the rand value is increasing as the investment value increases, so does the fee I’m charged.
Has the administration cost on my account really increased by 18% over the past year as a result of the investment increasing by 18%?
So, here’s my proposal for platforms regarding their fees.
Charge a small percentage-based fee – say 0.1% – calculated on the amount being invested. But have an upside cap.
Sure, this does benefit those with larger portfolios, but it gives the holders of smaller portfolios the ability to grow without an onerous fixed platform fee.
Reportedly some platform providers do have a capped fee, so drastically lower fees are possible and definitely desirable.
Perhaps most important is the mindset. Just because it has always been done one way is no reason to continue doing it that way.
As investors we must vote with our wallets and put pressure on skewed fee structures, because ultimately these fees are hurting our investment returns. As I’ve already said, I am happy to pay, but I want fair methodologies and fees.
This article originally appeared in the 29 March edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.