This is a very controversial topic, especially for Investment/Insurance companies and banks that have high management fees on their investments. However, as part of financial literacy, we need to be vigilant about this because it heavily affects our investment returns.
What are these fees for?
Management fees/charge or expense ratio is the cost of operating a fund. Actively managed mutual funds have fees because they are paying for an "expert" to manually manage the fund. They invest in research trying to determine the best asset to own. It is usually around 2-3% for actively managed funds in the Philippines.
Most mutual funds also have a backend/frontend load. This is just a pretty name for commission or sales charge. From my own experience, most mutual funds in PH does have this charge every time you add into your investment.
For Variable Insurance Linked Insurance, or VULs, they have more cost and charges compared to usual mutual funds. This is due to the fact that the Insurance company acts as a middle man for some premium to be invested in funds. This produces more overhead charges on top of the management fee of the selected funds.
Passive funds or Index Funds that follow a certain Index have low operational cost because it doesn't need a team to manage the fund. A good example of this is, FMETF (First Metro ETF) that follows the PSEi Index has only 0.75% fee. For international, Vanguard's S&P 500 (VOO) that follows the S&P500 has only 0.03% fee.
Be reminded that regardless of fund performance, fees are still deducted from your investment. That means, the higher the fees, the bigger the impact.
How does this affect your investment?
Costs compound exponentially, too. Look at the fund fact sheet on Mutual Funds/ETFs you want to put your money in, check the fees and do the math.
From this article from Vanguard:
"Imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you'd end up with about $430,000.
If, on the other hand, you paid 2% a year in costs, after 25 years you'd only have about $260,000.
That's right: The 2% you paid every year would wipe out almost 40% of your final account value. 2% doesn't sound so small anymore, does it?"
What should I do then?
When entering a new investment, always check for the fees and performance. To be honest, 2% is quite high. If you're planning to subscribe on funds from a company, always ask on what are the other charges and how does the management fee affect your investment should you invest with them. Especially for VULs and actively managed Mutual Funds, aside from management fees, there are other premium charges that will have significant impact. If they try to brush it off saying it's very small because it's a few hundred in a month, try asking them for a conservative computation with the charges and based on the fund's average performance over 5-10 years. If an advisor cannot respond to you with data, be skeptic about it and do your own math.
Do not shrug off management fees. By making informed decisions, you'll get more in the future. It's your money, take control of it.
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