For many investors, it is not only the return that counts, but also the costs associated with an investment solution. Fees are often incurred at different levels depending on the service and are not always explicitly disclosed. This circumstance makes it difficult for customers to aggregate the total costs into a single figure, which is why the comparability of costs between different providers is not trivial. Here, it is important to distinguish which type of service one is relying on, due to different cost structures of pure trading platforms and asset management mandates.
In this blog post, we will go into what fees can be incurred specifically in the latter case in order to create transparency and awareness.
Fees at a glance
Fees can be incurred on three levels:
- On the one hand, there are all fees incurred by the service itself, e.g. management fees for an asset management mandate.
- Next, there are fees associated with a specific portfolio and its management. A classic example of this is custody fees or transaction costs.
- Finally, a concrete investment instrument may also cost, such as an investment fund with an issue surcharge or management fees.
This can also be seen in the following table:
| Costs | Range from | Range to | Calculation basis | |
| 1st level | Management fees | 0.00% | 1.50% | p.a. of assets under management |
| Service | Profit sharing | 5.00% | 20.00% | of the generated return |
| Entry fees | 0.00% | 5.00% | of the amount to be invested | |
| 2nd level | custody | 0.10% | 0.50% | p.a. of the assets under custody |
| Portfolio | administration fee | 0.00% | 0.20% | p.a. of the portfolio assets |
| Foreign currency surcharge | 0.05% | 0.15% | on securities in foreign currency | |
| Account management fee | 0.00 CHF | 100.00 CHF | p.a. per account | |
| Position fee | 10.00 CHF | 40.00 CHF | per position in the account | |
| Brokerage | 0.20% | 2.00% | of the trading volume | |
| Spreads on foreign currencies | 0.01% | 2.50% | per currency exchange | |
| 3rd level | spreads on securities | 0.05% | 3.00% | of the trading volume |
| Instrument | front-end load | 0.00% | 5.00% | of the purchase amount |
| Sales commission | 0.00% | 3.00% | of the purchase amount | |
| Product management fee | 0.10% | 2.50% | of the invested capital |
Service fees
These are fees associated with the provision of the asset management service itself. These fees may depend on the asset class, so the fees may increase with the equity portion.
Management fee for asset management
The management fee is charged for each asset management mandate and is usually measured by the percentage of assets under management per year. It is often communicated very explicitly and can include different components.
This fee compensates the asset manager for his work of monitoring, managing the portfolio and analyzing and selecting individual investment instruments. This is the most costly part and so the management fee makes up the largest portion of the total cost.
- The more individual the client’s wishes are, the more effort is involved in asset management, which can increase the management fee.
- Often this can be compensated by a larger investment, as many managers offer a sliding scale of the fee, which decreases with increasing assets. If this fee is exceptionally low, it is likely that providers will compensate with other methods.
- The most favorable offers of robo-advisors start at 0.55% per year, since the degree of standardization is very high clients have no personal contact. With traditional private banks, the management fee can be up to 1.5% per year. However, a personal advisor and discretionary mandates can be accessed.
Performance fee for asset management
This fee is charged as a percentage on the return achieved by the asset manager and is uncommon in traditional asset management mandates. In hedge funds, this fee is widespread and is usually only charged above a certain minimum return, the so-called hurdle rate.
The idea of this fee is to align the incentives of the manager with those of the client. However, since the management fee already increases in proportion to the assets under management, this should already be incentive enough from a financial point of view to increase the client’s assets.
Entry fees in asset management
It can happen, although rather rarely, that an entry fee is charged. This is charged once as a percentage on the amount to be invested. These fees are associated with the initial expense incurred in setting up a mandate.
While this is uncommon in asset management, this fee is more commonly applied in the area of financial advisory and brokerage services, often called a “finders fee.”
Portfolio fees
The portfolio fee group includes all fees associated with managing a particular investment portfolio. Some of these fees cannot be influenced by the asset manager itself, especially if it is an independent asset manager. The custodian bank, which holds the securities in safe custody and carries out the transactions, determines the amount of these fees.
Custody account management fee
The custody fee is a charge for the safekeeping and administration of securities. These are held at the custodian bank, which in turn charges a fee as a percentage of the custody account value, but which is usually capped at a certain value.
- The amount of the fee often depends on the extent to which the bank charges for additional services. In addition, custody fees are often linked to transaction costs or a certain trading activity.
- For example, low custody fees are often compensated with higher transaction costs or a minimum number of transactions must be executed per quarter in order not to be charged (“inactivity fee”).
- However, higher fixed custody fees often occur in combination with lower transaction costs. Which cost model is more advantageous thus strongly depends on the quantity and frequency of transactions
Administration fee
In addition to custody fees, custodian banks may charge fees for special administration of the portfolio. This includes, for example, posting coupons and dividends or posting corporate actions.
However, some banks charge each item individually without charging a flat administration fee. In general, however, this fee is rather uncommon nowadays, as the costs are often already included in the portfolio management fee.
Foreign currency fees
We now come to what is probably one of the most underestimated and at the same time most non-transparent fees: foreign currency fees. This fee is incurred when securities are traded or held in foreign currencies.
- On the one hand, the bank charges for the safekeeping of securities abroad and, on the other hand, for the purchase or sale of these securities. While the fee for safekeeping abroad is rather rare, a fee on foreign currency transactions is common.
- This is a so-called “spread“. The spread is the difference between the bid (buying) and ask (selling) prices, also known as bid and ask. In very simplified terms, these are the prices at which a trader is willing to buy or sell an asset.
- The trader (or “market maker”) earns by having the bid price lower than the ask price. This means that he buys at a lower price than he sells. In the case of a foreign currency transaction, the bank in our example takes a fee by giving the customer a worse exchange rate than the current market rate for the foreign currency transaction. For example, a customer now pays a higher price for the U.S. dollars he needs to buy a U.S. stock than the current market price. This also works in reverse when a foreign currency security is sold.
The overall effect of this fee depends, of course, on how often and how much is traded in foreign currencies. That is why it is difficult to show this fee from the beginning. The aforementioned lack of transparency comes from the fact that, on the one hand, different spreads are charged depending on the currency and, on the other hand, the exact amount of the fee can only be seen by the customer checking the settlement of the foreign currency transaction and comparing the applied exchange rate with the market rate valid at that time. If the settled exchange rate is not explicitly stated in the first place, the customer still has to calculate it himself. Many customers are often unaware of this implicit fee, as only a few providers clearly indicate it. Thus, an offer that appears to be favorable at first glance may not be so favorable in the end.
Transaction costs or brokerage fees
Transaction costs are one of the most frequently incurred costs, along with the custody account management fee. These are incurred on the transactions themselves and, depending on the provider, can be either a percentage of the traded volume or a fixed amount per transaction.
The custodian bank charges this fee as part of its own expense based on trading activity to cover its own costs. These are partly charged by the exchanges and brokers. The amount of these costs strongly depends on the exchange, the currency, the investment instrument and the traded volume. Therefore, it is important not to underestimate these costs, especially if a portfolio is managed more actively and transactions are carried out regularly.
Position fee
The position fee, as the name suggests, is charged by some banks per position and in addition to the custody fees. The amount of this fee often varies by asset class and may not apply at all to bank-owned products. This fee is uncommon in asset management mandates, but is more often applied in advisory mandates.
Instrument fees or product costs
The last and lowest level of fees is incurred on individual instruments and products within a portfolio. These costs depend heavily on the type of product and the underlying asset class. For example, ETFs are less expensive than mutual funds and equity products are often more expensive than other asset classes.
In general, costs are only incurred for products that have an issuer or provider that issues or manages them, such as ETFs, mutual funds, or structured products. These are not incurred for instruments such as equities or bonds, as these also do not have to be actively managed or constructed.
Security spreads
We have previously discussed what so-called “spreads” are in the case of exchange rate fees. These can also occur with securities themselves. Basically, this has to do with the liquidity of a security and therefore again depends largely on the instrument itself.
In simple terms, liquidity indicates how easily a security can be traded without affecting the current market price. Sufficient liquidity is ensured by so-called “market makers” who always buy or sell when a corresponding counterparty enters the market. This ensures that market participants can execute their desired transactions even in less liquid markets.
The market maker pays for this by buying a little cheaper and selling a little more expensive than the “fair” market price. These costs cannot be directly influenced by clients in asset management and are generally not easy to quantify. We have listed them here for the sake of completeness, but they tend not to be too relevant in practice.
Front-end load
The so-called front-end load is a fee that is charged when purchasing investment funds. It is calculated as a percentage on the amount to be invested and can be up to 5% for actively managed equity funds.
Due to the fact that the fee is incurred with each purchase, it is particularly important for regular deposits. Banks often waive the front-end load on their own products to make them more attractive to their customers.
Management fee for funds
The management fee is also an important cost item in connection with investment funds. This cost is charged for management by the fund manager. It can be compared to the management fee at the mandate level, as a client’s own investment fund is managed by the asset manager.
A distinction is made between actively and passively managed investment instruments: Active instruments actively try to outperform the market, while passive products track an index or the market. Due to the higher effort in the first case, the fee is also correspondingly higher. ETFs also have a management fee, although it is much lower than most mutual funds because they take a passive approach.
Sales commissions
The sales commission is a special type of fee that is usually only incurred in connection with structured products. Issuers of these products get paid for the effort involved in constructing and managing them. The fee is a percentage of the amount to be invested and is charged directly against the cost price.
Structured products are a special type of instrument and belong to the asset class of “alternative investments”, which is why only a small part, if any, of the portfolio is invested in them.
