Business

Slashing trading costs can generate better returns

A 2% savings in trading fees over 30 years increase your overall returns by approximately 50% due to the compound interest

By MARK RAO / Pic By BLOOMBERG & https://www.stashaway.my

THE basic investment goal is to generate the highest returns with the lowest initial cost. But this is often easier said than done. And the cost associated with trading in the financial market from one-off brokers’ fees to recurring expenses often deter first-time investors.

While there is an element of risk in many types of investments, the value of investing has become increasingly relevant in Malaysia as majority of Malaysians are not financially ready to retire and to have sufficient funds to live their old age in comfort.

Investing in the financial market does not only complete a person’s existing savings, but can be the driver to generate the returns needed to secure and provide for a comfortable life later.

And “low-cost investing” — or minimising the expenses incurred when and during investing — can prove to be the best return yet.

According to StashAway, a digital wealth management platform designed to reduce market entry costs and annual trading fees, a 2% savings in trading fees over 30 years increase your overall returns by approximately 50% due to the compound interest recognised over that period.

Wong says putting different asset classes together allows investors to be even more diversified

Its country manager for Malaysia Wong Wai Ken said investors need to focus on trading fees before investing, especially amid the challenges in today’s financial markets.

“In the current low-yield environment, where your returns are reduced to negligible levels from all the spreads taken by banks and advisors (fees, commissions, etc), low-cost investing is more important now than ever,” he told The Malaysian Reserve (TMR).

StashAway is designed to save clients 3% to 5% in fees per annum with the annual management fees of between 0.2% and 0.8%, while no sales or switching charges (incurred when switching from one unit trust to another) are imposed.

This is against the 1.5% to 2% management fees, on top of the 3% to 5% in sales charges, typically charged by unit trusts, Wong claimed.

StashAway users are also allowed to open investment portfolios with a zero-dollar minimum balance irres- pective of their net worth and to carry out unlimited withdrawals with no associated costs.

“We are able to charge such low fees as a result of a combination of our intelligent asset allocation strategy, the application of fractional shares and cost-efficient exchange-traded funds (ETFs),” Wong said.

StashAway is an ETF-focused robo-advisor that builds investment portfolios by exclusively using ETFs to focus on innovative and low-cost ways to grow your wealth for the long term.

“Looking at ETFs versus other investment products like a unit trust, you would see that they are generally more liquid and cost effective for investors,” Wong said.

This in contrast to actively managed funds which come with higher expenses as fund managers need to employ teams of people to determine which securities are to be included or removed from a portfolio at any point in time, he said.

ETFs, on the other hand, are “passive” funds that track an index and are managed algorithmically.

StashAway currently has 32 asset classes across its system, covering commodity, healthcare, energy and finance-related equity markets, as well as several fixed-income asset classes, that would otherwise be out of reach of many local investors, Wong said.

“Putting different asset classes together allows investors to be even more diversified than before. So their portfolios will be able to withstand economic, political and market volatility.

“Having portfolios that are less volatile and are protected in markets that are declining allow customers to focus on the long term and stay invested.”

StashAway has grown significantly since it was launched in Singapore in June 2017, before the launch in Malaysia the year after, with well over 100,000 users across its platform in both countries.

From July 2017 to Sept 2019, the cumulative performance of the company’s portfolios fetched returns of between 9.5% (for the lowest risk portfolios) and 21.5% (for the highest risk portfolios), outperforming benchmark FTSE Bursa Malaysia KLCI which declined 11.2% over that same period, Wong said.

He said returns over two years are too short to assess StashAway’s full potential, but said the returns gene-rated nonetheless highlights the importance of diversifying your investments beyond Malaysia.

“What is clear is that we are able to protect portfolios in tough times and grow in good times. Our portfolios are able to weather shocks, having gone through three market corrections in 2018 (defined as a 10% to 20% decline) and an extremely volatile third quarter of 2019.”

The Real Costs Behind Investing
In its article last week, TMR highlighted the main costs associated with trading in the Malaysian stock market.

In addition to the cost of shares bought or sold, transaction costs include brokers’ commission, stamp duties and clearing fees.

Majority of Malaysians are not financially ready to retire and to have sufficient funds to live their old age in comfort

According to Wong, other “one-time” expenses include an entry fee or initial charge, which is usually embedded into the pricing of structured investment products, to buy into an investment fund.

He said banks typically charge a 3% to 5% entry fee for unit trusts, meaning that if you invest RM100,000 into a product, only RM95,000 to RM97,000 is actually invested.

“The compounding effect of this initial cost is very significant as it reduces the capital at work from Day 1,” he said.

Other expenses that are often overlooked are switching fees, typically charged at 1% to 2% of your investment; conversion fees to convert your returns into the desired currency and redemption fees.

The latter, which ranges between 1% and 5% on average, is payable to the distributor when you sell the units from your respective unit trusts. Those that charge this fee do not usually charge entry fees.

Recurring expenses, meanwhile, include annual management and platform fees.

Wong said equity unit trusts in Malaysia charge on average between 1.5% and 2% annual management fee which is usually split between the offering bank (in the form of “trailer” fees) and the unit trust manager.

He said these trailer fees create a misalignment of interests between the distributor (the bank or financial advisor) and the investing customer, not to mention raising the overall cost of investing.

Lastly, platform fees refer to the fees paid if you purchase a unit trust via a fund platform or alternatively, if your financial advisor uses a fund platform.

Making the Right Investment Decisions
StashAway is one of the many investment opportunities in the market today, with many brokerage firms rai-sing its digital and online capabilities to facilitate ease of trading and provide more attractive cost propositions.

This is especially amid growing interests from millennials who are looking to venture into the financial market, but want more flexible and cost-attractive options to do so.

Thus, it is imperative that you first determine your financial goals and risk appetite, and measure these considerations against your current income level, before investing.

Wong said any prospective investors should have a six-month cash reserve, a disciplined emotional state and an investing framework based on proven methods, while keeping up with market-related news.

“We urge investors to cultivate good habits such as identifying investment goals, investment time horizon and risk appetite before investing,” he said.

“Having achieved this, invest across different asset classes using simple and low fee platforms to focus on asset allocation.”

He believes this approach, which is employed by sophisticated investors, will put retail investors — the you and me in the financial world — in good stead.


The above article is not a recommendation for readers to invest in any products, platforms or any asset classes. Investors are always advised to perform their own analysis, due diligence and make a sound judgement before investing in any financial products.

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