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.
