In the property sector there is the very well know saying that says the 3 most importing aspects to consider when buying a property is; 1. LOCATION, 2. LOCATION, 3. LOCATION.
The exact same principle applies when investing in retirement funds, unit trusts, tax free investments or offshore investments. The 3 most important things to consider is; 1. FEES, 2. FEES, 3. FEES.
Why are fees so important?
I will look at 2 practical examples to help you understand the impact of fees on your investment.Before I look at these examples, I would quickly like to explain to you the different fee layers most investments have:
- Investment management fees – This is the management fee that the investment company charges to invest your money. A typical balanced fund charge anything between 1% – 2%
- Admin fees – This is the fee that the platform you use charge to administrate the investment on your behalf. This can be anything between 0.3% – 0.6%
- Financial advisor fees: – This is the fee that the financial advisor charges for his advice and continues service towards the client. Anything between 0.5% -1.5%
If you consider these fees you would agree that a total investment fee can easily be 2.5% for the client at the end of the day. In my examples I would therefore use 2.5% as the average industry fee.
Mr RE Tired, is retiring at the age of 65 and has R 3000 000 in his pension fund which needs to be invested for his retirement. He’s total fee after investing the R 3000 000 is 2.5% p.a as explained above.
Let’s determine what Mr RE Tired total fees paid will be after 10 years in his investment (Assuming an annual return of 8%)
Total fees payable over a 10 year period will be R 1.1m. That is a crazy 37% of the initial investment amount of R 3m.
Does this seem reasonable?
Mr E Ager starts saving R 1000 p/m (increase of 10% p.a) for retirement at the age of 21 in an investment product with a 2.5% annual cost. At age 65 his retirement fund value (assumed growth of 10% p.a before cost) will be R21.6m.
Mr C Lever also starts early saving R 1000 p/m (increase of 10% p.a) for retirement at the age of 21 in an investment product with a 1.5% annual cost. At age 65 his retirement fund value (assumed growth of 10% p.a before cost) will be R26.3m.
Mr C Lever’s fund value at retirement is therefore 22% higher than that of Mr E Ager.
How do you save on investment fees?
- Investment management fees
• Each investment fund has different fee classes, make sure you are invested on the best fee class.
• Stay away of funds that charge performance fees.
• Use ETF’s or passively managed investment funds. They have proven that they deliver great performance at a fraction of the cost as an actively managed fund.
- Admin fees
• Consolidate different investment products onto one investment platform. Admin fees are charged based on the value of the investment, and the more funds invested on one platform then lower the fees.
• Some platforms do not charge an admin fee if you use their funds, but they only charge admin fees if you use external investment funds. Consider using these platforms.
- Financial advisor fees:
• Ask your advisor to show he’s fee to you in your quotation.
• Make sure he does not charge an initial fee.
We all know that nothing in life is for free. There is however a big difference to what is reasonable and what is unreasonable. Only you can decide what is reasonable for you. Make sure the total fees that you are paying on your existing investments are reasonable, as it will have a severe impact on your investment outcome.
Heinrich Coomans | CA(SA) | CFP ® is a director at Affluence Group and specialises in Investments, Personal and Business Insurance. For any questions please contact him at email@example.com