When we talk about investing – whether inside superannuation or a personal portfolio – fees tend to dominate the conversation. And yes, fees matter: they’re certain, they’re visible, and they compound over time. But here’s the catch: focusing on fees alone can lead you to the wrong solution. The “cheapest” option isn’t necessarily the best option for your goals, your risk tolerance, or your stage of life.
Think of fees as the price of a service, not the service itself. What actually drives outcomes is the portfolio design behind those fees: the strategy, diversification, risk controls, rebalancing discipline, and access to the right assets for your objectives.
Start With Goals, Not Fees
Before comparing products by cost, get crystal clear on what you’re trying to achieve:
- Maximise long‑term returns: You might accept higher short‑term volatility if the strategy targets growth drivers (e.g., small-value tilts, active stock selection, private markets access, or tactical overlays). Those capabilities often cost more.
- Reduce volatility / smoother ride: If you’re risk‑aware (or nearing retirement), a portfolio that reduces drawdowns – through diversification, defensive assets, and risk management – might also carry higher fees than a basic index.
- Inflation alignment: If your priority is maintaining purchasing power, you may want real assets, inflation‑linked bonds, or active duration management. These strategies can be more complex (and pricier) than a simple market tracker.
In short: goals drive strategy, and strategy often drives fee level.
When Higher Fees Can Be Worth It
Fees should buy you something tangible. Here are scenarios where a higher fee may represent fair value:
Access & breadth
Some strategies provide exposure that a plain index fund doesn’t – think inflation‑linked bonds, listed/unlisted infrastructure, or specialised factor tilts. Access and due diligence cost money, but they can broaden diversification and improve the portfolio’s job-to-be-done.Risk management & the “sleep at night” factor
For investors transitioning into or in retirement, sequencing risk (big losses early in drawdown years) can be more harmful than a slightly higher ongoing fee. Paying for downside risk controls or dynamic rebalancing can help keep withdrawals steadier.Consistent implementation
A rules‑based or actively managed approach that rebalances, harvests losses, or tilts toward rewarded risks can add real-world value – especially when you don’t have the time or skill to do it yourself.True net outcomes
A higher-fee strategy that net of fees delivers stronger long‑term returns or better risk‑adjusted returns can leave you better off than the cheapest available option that lurches around with the market.
A quick, simplified example (not advice):
Portfolio A (low fee) returns 6.0% with a 0.10% fee ⇒ net 5.9%.
Portfolio B (higher fee) returns 7.2% with a 0.70% fee ⇒ net 6.5%.Over 20 years, $100,000 grows to about $312k (A) vs $352k (B). That’s a $40k difference in favour of the higher‑fee option because net returns and compounding matter more than headline fee alone.
When Low Fees Are Perfectly Sensible
There are many cases where a low‑fee index approach is exactly right:
- You have a long time horizon, high risk tolerance, and prefer broad market exposure.
- You value simplicity and cost control above all else.
- You’re comfortable riding out market volatility without behavioural mistakes (panic selling, chasing performance).
Low fees are a feature, not a flaw. The key is recognising whether an ultra‑cheap portfolio is fit for your purpose.
Volatility, Behaviour, and the Real‑World Cost of “Cheap”
A low‑fee index option can still be expensive if it triggers costly mistakes. If you panic in downturns because your portfolio is too volatile for your comfort, the behaviour gap can outweigh any fee savings. Likewise, if a low‑fee option lacks the inflation alignment you need, your real (after‑inflation) outcomes may fall short – even if the headline fee looks fantastic.
Inside Superannuation: Fees in Context
Super funds typically disclose investment fees (often expressed as an Indirect Cost Ratio/ICR), administration fees, and sometimes performance fees. Before you compare, check the PDS and look at net performance after all fees and taxes. Also consider risk level and consistency – not just the one, three, or five‑year performance.
How to Compare Apples with Apples
Use this quick framework:
- Define the job: Growth? Income? Lower volatility? Inflation alignment?
- Match the design: Does the portfolio hold the types of assets that do that job?
- Check net outcomes: Look at returns after fees and taxes, preferably across different market conditions.
- Assess risk: Consider drawdowns and risk‑adjusted metrics (e.g., variability of returns).
- Ensure discipline: Is rebalancing and risk control part of the process?
- Total cost of ownership: Add investment + admin + platform + advice costs where relevant.
- Behaviour fit: Will you stick with it through the cycle?
Three Goal‑Based Illustrations
Growth‑Focused Accumulator (age 35–50)
Willing to accept volatility for higher expected returns. Might justify higher fees for factor tilts or selective active approaches. Priority: net‑of‑fee growth.Pre‑Retiree Seeking Smoother Ride (age 55–65)
Sequencing risk looms large. Paying for defensive tilts and rebalancing may protect withdrawals, even if fees are higher. Priority: capital stability.Retiree Wanting Inflation Alignment
A mix including real assets and inflation‑linked bonds can help preserve purchasing power. This may carry higher fees than a pure market index. Priority: real income.
Bottom Line
Fees are crucial – but value for money is what matters. Start with your goals, then align with a portfolio that best does that job net of fees, with a risk profile you can live with. The “best” option isn’t the cheapest; it’s the one that gives you the best chance of achieving your goals.
General information only. This is not financial advice. Consider your circumstances and the relevant PDS, or speak with a licensed adviser before acting.
