Recently, after meeting with a client, he asked me to have a look at his mother-in-law’s living annuity to see if she was invested in the right funds. After some analysis, I was shocked to see that the annual fee on this investment was in excess of 3.5% per annum! No wonder the returns on this investment could not even keep up with inflation.
Sadly, it seems that the full asset management fees are not always disclosed and is usually the biggest cost to investors. Although there is regulation in place, communication too often simply states that the fees can be obtained from the investment manager or financial advisers with no full disclosure of asset management fees on the statements.
It also seems that clients don’t always understand the different fees and how they add up. Most investments have asset management fees, adviser fees, admin fees and platform fees. Within asset management fees, there are management fees, performance fees, transaction fees as well as their own admin fees. Some fund of funds also disclose “asset allocation” fees to rebalance their funds, adding yet another layer of fees to an already unclear industry.
And all these fees add up. Paying more than 2% per annum on fees will destroy your retirement savings. That’s because of the power of compounding (often described by investment gurus as the most powerful force on earth). A seemingly small reduction in annual returns can add up to really big losses over the long term.
Take for example, investing R10 000 per month over 20 years and earn a net return of 10% per annum on the investment. If you are paying 2% per annum too much in fees over that period, you are effectively paying over R1.7m of your investment to extra fees! Reducing excessive fees will create an almost 30% increase in your retirement savings.
Put differently, if you could save only 1% of fees every year, you could potentially retire five years sooner than planned. Or conversely, you may have to retire five years later than anticipated!
High fees are the silent killer of retirement savings. Calculating how much you are actually paying every month in fees is the first step to wiser saving. Recognising this, My Treasury has secured our users a free, no-obligation investment fee assessment by Old Mutual’s Roy Topol, a leading investment professional in the financial services industry. All you have to do is complete the form below and Roy will work out your total fees for you. This will help you start the journey to smarter retirement saving.