For every 1% you can annually save in investment fees, it is possible to have up to 50% more money after 40 years. And that’s a fact.
Consumers are becoming more aware of the fees charged on their investments, but not of the impact it has on their investment growth over time, says Tracy Jensen, Head of Institutional Business Development at 10X Investments.
“Investment funds will rarely offer it, but investors should ask for an example of the impact of fees on their investment. It should give a clear picture of the effect on their returns in the long term.”
Furthermore, a high fee structure definitely doesn’t equal high performance. According to the Global Fund Investor Experience 2015 report, low fees are the most consistent predictor of good investment performance.
“This is because of the compound costs of fees over time. While 1% or 2% might seem very little now, the impact 10, 20 or 30 years down the line can be enormous,” Jensen says.
To explain the effect of fees over the long term, she gives the following example: If you invest a lump sum of R100 000 over your working life of 40 years, it will grow to R1,24 million in today’s money given an earnings growth of 6,5% per annum plus inflation.
However, this is before fees. Paying a fee of 0,5% per annum as a % of the investment value, the lump sum will only grow to R1,02 million.
If the fees amount to 3% per annum of the investment value, the lump sum will grow to a mere R370 000 over the same period.
“An investor will almost have 50% more money after 40 years for every 1% in fees they can save,” Jensen says.
“To ensure that fees are not eating into your investment return, aim to pay 1% or less in fees per year. It is often possible to move to a lower cost product if you are already invested in a high fee product.”
Unfortunately some consumers quite easily end up paying fees of around 3% per annum without realising the consequences on their investment returns.
“There are many different types of fees that can be charged on one investment. This could be misleading if you don’t realise how much you pay altogether,” Jensen says.
She explains that there are, for instance, administration fees, which are mostly charged in the retirement fund space; platform fees when you invest via a LISP; as well as investment management and performance fees, which are usually explained in the Total Expense Ratio on the fund fact sheets of unit trusts.
“Some life insurers also charge guarantee fees. However, according to the National Treasury’s retirement reform discussion paper, a significant portion of what is called a guarantee charge may simply represent investment fees.”
Last, but not least, there could also be advice fees. “If you use an adviser this fee is expected, but some companies only allow access to an investment via intermediaries even though their advice are not required.”
According to Jensen investors should, furthermore, be aware that some fees are not necessarily required and not charged by other companies in the same investment space.
10X, for example, only charges an administration fee for corporate clients. There are no administration, performance, advice or platform fees for individual products. “Individuals only pay an investment fee, which makes it very transparent. There is no confusion because the investor knows exactly what the fee amounts to.”
Jensen says more clarity for consumers are expected with the implementation of the Association of Savings and Investments South Africa’s (Asisa) Standard on Effective Annual Cost (EAC).
“It is a standardised disclosure methodology that can be used by consumers to compare charges on most retail investment products.”
The EAC comprises four separate components into which various charges are allocated. The components are investment management charges; advice charges; administration charges; and other charges.
The aim is to place consumers in a position to make better informed decisions around retail savings and investment product choices. It became effective in June and the implementation of the first phase is expected to be completed by the end of this month (October).
“Investors have the right to know and to fully understand how fees affect their investment value. It is important to keep this in mind every time you review your investments or consider a new one,” Jensen says.
This article was sponsored by 10X Investments
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