When investing, good services and products are worth paying for - after all, it's about your own wealth. Nevertheless, many underestimate the enormous impact such fees have.
For example, you plan to invest 20’000 CHF for the next 10 years and visit the nearby branch of your bank. The friendly advisor will explain that such a “small” amount should be invested into a fund to achieve sufficient diversification. Fortunately, the bank has exactly such a fund to offer: A sustainable growth strategy fund.
The funds' fee structure is explained in the Key Information Document: an ongoing product fee of 1.3% per year. In addition, there is an issuing and exit commission, each 2%. Sounds all negligible? In this 10 years example and a moderate market scenario, the fund will totally cost you 4’500 CHF in fees, over 20% of your initial investment. More if you consider missing re-investments over time.
On top, you may have to pay for the bank’s advice too (the advice buy the bank's own fund 😊 ). Let’s assume a 0.5% advisory fee per year on top, and in 10 years, it’s over 30% in fees compared to your initial investment.
What about the rising “commission-free” platforms and neobrokers then? They often get kickbacks from third parties, for example, market makers, operating with the spread (price difference between buy and sell for the customer). The role of a typical neobroker is in this case that of an Orderflow Provider (OFP), selling customer order flow to third parties. In some countries, such as the UK, this model has been banned for retail clients since it was considered to undermine the transparency and efficiency of the price formation process. In Switzerland, this business model is not yet common, but we have access to a few international platforms.
Other neobrokers lure people to expensive and inappropriate products such as CFDs (contracts for difference). As such platforms are easy and fun to use, people tend to trade too much and lose money in the long term. Trading out of market hours is convenient, but you may face high spreads.
Here is a non-exhaustive list of typical fees encountered in Switzerland
Custody fees for safeguarding your financial assets. This fee can range from 0% to 0.4% of your investments per year and often include a minimum fee of 50-200 CHF. For smaller investments, select a provider having low minimum custody fees.
Some providers will charge inactivity fees if you have no open positions and have not been trading for a certain period. It can be around 10 CHF per month, and you may consider closing inactive accounts.
Trading or brokerage fees
These fees are charged when you buy or sell. Trading fees typically range from 0% to 0.5% of the transaction amount and have minimum fees between 0 and 40 CHF. For smaller investments, it is essential to compare the minimum fees, for larger transactions, the percentage-based fee is more important. As a rule, try to avoid excessive trading if your focus is wealth accumulation and not the thrill.
Taxes and exchange fees are sometimes included, sometimes not.
The commission-free platforms have another business model, see below the bid-ask spread.
Only a few banks offer hourly rate advice or recommend independent, low-cost investment products such as Exchange Traded Funds (ETFs). It’s a shame, good personal advice is valuable and worth paying for it.
Most Swiss banks recommend instead their own expensive products, and for this “advice,” you pay 0.4%-1.2% per year. It is a conflict of interest, but as long as people accept paying for a haircut but not a fixed fee for personal investment advice, it will not change.
Robo-advisor platforms have lower “advisory” fees, between 0.3%-0.7%, including custody fees. If the Robo Advisor invests in Exchange Traded Funds (ETFs), your product fees will be significantly lower. However, it would be inappropriate to compare Robo-advisors' fees with those of personal consultation and depends on your preferences.
Ongoing Product Fees
When you invest directly in equities, you own a part of this company, it is not a financial product and has no such fees. You must take care of the necessary diversification yourself. Also, bonds and crypto coins have no such fee.
When investing in funds, ETFs, crypto ETNs, structured products, certificates, CFDs, etc., you pay for the management of these products, the management fee. Sometimes the ongoing product fee has an additional transactional component, for example, every time the fund is rebalanced by its manager.
You will not see ongoing product fees effectively, but they are included in the price development.
Fee differences between products can be very significant. Exchange Traded Funds (ETFs) passively follow an index, and fees vary between 0.1% and 0.5% per year. For funds and certificates, fees over 1% are very common, income-oriented funds typically have lower fees compared to growth funds, and the label “sustainable” often means higher fees.
In my view, it can make sense to pay such fees if a fund has a theme that includes specific research, I personally avoid buying standard strategy funds but prefer ETFs and direct investments in equities.
Issuing and exit commissions
When buying or selling funds, you often face subscription and redemption fees of 1-4 % of your investment. ETFs don’t have this type of fee, as they are traded at an exchange.
The bid-ask spread
The bid-ask spread is the difference between the buy and sell price. Per se, this is normal and depends on the liquidity of the exchange. Neobrokers get paid to route your trade not to a main exchange but to a 3rd party operating with these spreads. For smaller investment amounts, during normal trading hours, it does not necessarily have to be a disadvantage for the individual customer. It is very intransparent, and the model may soon hit regulatory attention.
For currency exchanges, the spread is essential too, and it’s worth comparing providers.
If you decide to change your provider, you will encounter the transfer fee. You may have to pay several hundred francs to your current provider to transfer your assets outs. For listed and liquid assets and small investment amounts, it can make sense to sell and freshly buy.
It is worth asking the new bank or broker to cover this cost, they often do.
Fees are not the only important factor in choosing your bank or broker. Still, informing yourself about the fees beforehand may turn out to be the best investment of all.
Written by Didier Matthey, CEO & Co-Founder of yeekatee