High investment fees can erode your investment returns and add up to hundreds of thousands of rands over the years. Take inflation into account, and you might even find that your investment has actually shrunk in value when the term ends or you withdraw your funds. We look at how investment fees can cut into your returns, and what you should look out for when you invest to make sure you get the best return.
Investment fees are a charge
Investment fees are the costs of investing and include management or administration fees and broker or advice fees. Every investment will have some charges, the trick is to make sure they are not too high because this means the costs of your investment will reduce your investment returns by too much.
What happens when investment fees are too high?
Your investment may not grow as you expect it to. For example, 10X Investments, a well-known investment manager, has shown that the difference between an investment charge of 1% and 3% is a 40% lower return on an investment of R100 000 over 40 years, if the investment return is 6%. Which means you could be paying over R100 000 in investment fees over the investment period. Here are the numbers:
|Investment amount||What your investment is worth after 40 years if the investment fee is 1%||What your investment is worth after 40 years if the investment fee is 3%|
|R100 000||R688 080||R304 160|
What to do if your investment fees are too high
To determine if your investment fees are too high, compare your investment fees to the return on your investment. You are looking for a return after investment fees and inflation that will grow your investment to an amount that allows you to achieve your financial goals. You also shouldn’t be paying investment fees that are a lot higher than the investment fees of other similar investment products.
Unit trusts and ETFs (exchange traded funds)
Your statement will have details of all the investment fees you are paying. If you feel your investment fees are too high, contact your financial advisor or unit trust management company to see how you can reduce your fees.
You may also opt to switch to a unit trust company with lower fees, although always check if there are any tax implications, such as capital gains tax that you need to pay when you switch your funds.
Endowments and retirement annuities (RAs)
Your policy documents will have the full details of investment fees and your annual statements should include fee details and any changes to fees.
Endowments and RAs are term contracts so the fees are usually set for the term of the contract and cannot be changed. Some investment companies may reduce fees on old products where fees were very high, as some have done in the past.
If you feel the investment fees are too high, ask your investment company or financial advisor to consider reducing these.
You can also choose to cancel an endowment and withdraw the funds; in which case you may pay a penalty fee.
You can make an RA paid up, which is where you stop contributing to it, but again make sure you are aware of any penalty charges and how this will impact your investment.
When you take out a new investment
Negotiate investment fees upfront. Always ask your advisor and investment company to explain exactly what they charge and why, and how these costs can impact your investment. Investment fees should be fair – an amount that remunerates the investment company for its work and your advisor for their work but doesn’t erode all of your investment returns.
Be careful of making an investment decision based on cost only. You also need to be comfortable with the underlying investments because these drive the investment return, Another point to think about is the kind of service your investment manager offers – do they give you regular statements and updates, do they offer digital transactions and are you happy with how they deal with queries? Together with costs, these need to be taken into account when you make a decision on where to invest.
Investment fees can seem quite complicated, but they are just the costs associated with your investment. Your advisor and investment company should be able to explain them to you, so you understand. If they can’t, look for another investment option. Always make sure you understand the fees before you invest.