Is cheaper better, or do you get what you pay for?

Welcome to Finance & Fury’s ‘Furious Friday’!

Today’s misconception – Is cheaper better, or do you get what you pay for?

Met with a client this week for an initial appointment – He had been reading ‘The Barefoot Investor’

I haven’t read it, but he had a summary of the tips in the book. His biggest take away were on the cost of things – basically, lower cost is the best option. But is it? You pay for costs for a reason - to get something out of it! Super – Admin fees and Management fees Listed Investment Companies (LICs) – Management fees

Very true that when looking at ‘like for like’ products – cheapest is generally the better option

When comparing the exact same: for example, buying a car – If ‘Car A’ and ‘Car B’ are the exact same, you go for the lower costs Close substitutes: If things are really similar ‘Car A’ and ‘Car B’ (Mazda and Hyundai) – Might go for a personal preference But how do you compare things like investments or superfunds? Not all things are created equal Comparing solely on costs can be a trap!

Not all things (like super) are 'like for like'

Admin fees Host Plus - $78 Sunsuper - $78 + 0.1% Australian Super - $78 Investment options, returns and net costs: Returns – MERs – taxes = Net Returns Income returns taxed at 15% on average

 Cumulative returns

Host plus Balanced Default - 74.31% Index Balanced - 69.60% Sunsuper - 67.01% Australian Super - 71.59%

You get what you pay for here – because they are all managed and invested in similar ways

These options, however, might not be the best for all

My funds

My super is with another platform that allows me to make the investments, so I can choose from 400+ other managed funds, direct shares, LICs etc. They do charge more though, so if you are going for multimanaged you will underperform, but if you go for other managers you will make up the difference. Needs to be non-index investments to make up the difference Active funds If you are higher growth, non-index, that increase in values more than income returns My fund pays me franking credits For me the costs are worth it to access the investments and franking credits

Cumulative returns

Average – 148.15% Not ‘like for like’ – More high growth than the industry funds. But costs more - $175 flat + 0.3% of balance MER – 1.4%

LICs vs ETFs

LICs -Companies Control Dividends Make active investment decisions ETFs – Trusts (similar to managed funds) Generally passive Dividends, FCs – flow through to the investor

Dividend payments

WAM – 6.6% WAX – 6.4% AFI – 3.96%

The take away

If you know you’re comparing ‘like for like’ – Lower cost is best But you shouldn’t base all decisions around the costs only If you are comparing two large cap funds that do the exact same thing Or two super funds doing the exact same thing Go for lower costs Some things are worth the extra cost!