When A 4% Investment Fee Hurts More Than A 20% Investment Fee

magician

 

When comparing investment service companies, it’s important to understand that not all fees are considered equal. 

 

Companies often use complicated fee structures as a smoke and mirrors show.

 

Ongoing Fees Are The Most Damaging

 

A 4% ongoing fee is worse than a 20% upfront transaction fee.  OK, nobody charges a 20% upfront fee (at least no firm that I know of!) but many products cost investors 4% or more in ongoing fees per year.

 

Those ongoing fees are a result of mutual fund costs (expense ratios) plus platform costs.  Investment products offered by Friends Provident, Zurich International, Royal London 360, Royal Skandia/Old Mutual (which are often brokered by the DeVere Group) can cost 4% or more per year when counting mutual fund costs plus ongoing account charges.

 

The ongoing charge is the one that hurts.  Compare ongoing charges of 4% per year with transaction charges of 20% plus a 1% fee.  The results may surprise you.

 

$10,000 Invested Each Year For 35 Years

 

 

20% Transaction Charge Plus 1.4% Total Ongoing Fees

0% Transaction Charge Plus 4% Total Ongoing Fees

Amount Invested Per Year

$10,000

$10,000

Assumed upfront charge (remember that nobody charges 20%)

20%

0%

Amount getting deposited after upfront charge

$8000 per year

$10,000 per year

Assumed (pre-fee) rate of investment return

9%

9%

Annual ongoing account fees including fund charges

1.4%

4%

Annual Rate of Return After Account Fees

7.6%

5%

Investment Duration

35 Years

35 Years

Portfolio End Value

$1,357,416

$948,363

 

You can see that ongoing charges are far more damaging than upfront transaction costs.  This is a dramatic example, using an upfront transaction charge of 20% on everything that the investor deposits.

 

Nobody charges that much!  But as you can see, even if they did, they would do better with ongoing fees of 1.4% compared to somebody paying 0% in transaction costs, but a 4% ongoing fee.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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