In partnership with 10X Investments
What’s the point of investing if we aren’t investing for the future? I mean, that’s exactly what we’re trying to do, right? And that’s why I’ve really been enjoying the 10X Investments campaign with Nik Rabinowitz, where he gets a visit from his future self.
It is a fun way of discussing the importance of investing for the future and highlighting some of the basics that we sometimes forget.
One of these fundamentals that we often neglect is the fees that we’re charged.
Did you know that fees can cost you 40% of your retirement?
Yip, you read that correctly. 40%.
What are investment fees?
Investment fees are the costs involved in managing your investments. They come by many names, such as Management Fees, Admin Fees, Fund Costs, Performance Fees, and etc. It’s the money that the financial institution (and any intermediaries) take from your investment in order to manage your money.
There is nothing wrong with paying fees for someone to manage your investments, or in fact to create the opportunities for you to invest in. What is troubling, though, is the high cost that some providers charge.
A 4% fee based off your fund value can eat away all your growth for the year, especially when in a recession, as we are now. If you can earn a healthy 6% guaranteed growth in a fixed deposit right now, your money in an investment with a 4% fee would need to earn 10% growth just to match that. Now that’s quite a tall order in the middle of a pandemic.
It is important to remember that higher fees certainly don’t guarantee better performance. An investment with an average growth of around 10% and a fee of 1% is better than an investment that offers a 12% growth but with a 4% fee besides, as I have said, high fees do not necessarily mean better growth.
How do fees affect my investment?
Much like compounding interest, the effect of high fees is more obvious over the long term. That doesn’t make it less important, it’s just that fees on small investments are often unnoticed. The principle however is vitally important to understand.
Here is a very basic example of investing R2,500 at the beginning of each month with a fixed growth of 6%. Compare the grey columns, which show a 4% fee, with the orange and green, which have a 2% and 1% fee respectively.
The difference in the overall fund value (or running total in the image) is insignificant over the first few months. The difference however between the 4% fee and the 1% fee after 5 years is more than R12,000. Now that’s a big difference!
After 10 years the difference between a 4% fee and a 1% fee is R57,000! Now imagine the compounding effect of this over 30 or 40 years. It just gets worse and worse (if you are paying high fees), or better and better if you have a low fee provider.
Years of being warned that “you get what you pay for” has made us equate high prices with better quality. Now, that may be the case when you’re buying a T-shirt but when it comes to investing you actually get what your don’t pay for.
See more on why fees matter.
Can I pay less in fees?
That’s a definite “yes and no”.
You may not necessarily be able to pay lower fees at your current provider, or on your specific product type. But you could likely find alternative providers that charge lower fees, or consider consolidating or changing your investment. This should be done with careful consideration, though, as there may be unexpected consequences from your decision. A qualified financial planner can certainly advise.
As for your Retirement Annuity (RA), 10X Investments offers an index-tracking product at an exceptionally low 1% fee. You can ask them for a free report comparing your current provider and fee structure with theirs. Definitely an eye-opener and something worth considering.
Investing for the future
Any investment that you make is essentially an investment for the future. Whether it’s the best option or how it will perform over years is unfortunately not an exact science.
Some key considerations would be the following:
- Understand how much you actually need for the future
- Think about whether you intend to retire in South Africa or abroad
- Consider aging parents or other dependents
- Create a holistic financial plan for you and your family
- Set targets and goals based off this plan
- Look at your existing investments to see if they are optimal for your plan and decide what (if anything) to do about them