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

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.