It’s your money – so take control of it and give yourself the option to retire sooner, says Hannah Goldsmith, founder of Goldsmiths Financial Solutions.
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How fees add years to your retirement plans
Thousands of people could retire earlier if they reviewed the fees being charged on their retirement and investment plans.
The Financial Services Industry charges fees on all investment products – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios.
There is nothing wrong with that – but most people have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
I am not aware of any other situation where individuals buy a service without understanding the full impact of the costs they will pay.
Most people, if short-changed in a shop, will raise the point immediately.
We regularly shop around to make savings on a purchase or compare car or contents insurance and energy suppliers to get a better deal.
So, why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle?
After all, if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.
It's never too late to make a change
Regardless of age or how much money you have, high industry fees can delay you reaching the day you start your retirement.
With the new update to the Markets in Financial Instruments Directive (MiFID 11), which came into force last month, investors have never had so much information available to them.
We now have the power to take back control of our money from the Financial Services Industry and do what’s right for you.
After all, this is our money and we are saving for our retirement – not our fund managers'.
Confusion over what we’re paying
Very few investors understand the fees and the impact of those fees.
And therein lies the problem; if we do not know how much is it costing us in total Financial Services Industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we don’t have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
To help unravel the mystery, let’s start by looking more closely at the fees you can be charged.
Industry fees can be wide ranging depending on each individual client’s portfolios. Typically there will be:
- Product charge (also called a wrapper fee in some cases)
- Total Expense Ratio (TER). This is the total cost of managing and operating the investment fund (management fees plus expenses such as trading, legal fees etc.)
- Financial adviser fee
Here are three examples of how these fees can vary and what impact they can have:
|
|
Investor 1 |
Investor 2 |
Investor 3 |
|
Product charge |
0.4% |
0.4% |
0.4% |
|
Average TER |
1.8% |
1.8% |
0.16% |
|
Financial adviser fee |
1.0% |
0.5% |
0.5% |
|
TOTAL COST |
3.2% |
2.7% |
1.06% |
Busting the low-fee myth
Low-fee does not mean low-return – far from it.
In my experience, I rarely come across an actively-managed portfolio that outperforms (after fees and charges) a globally diversified low fee charging portfolio – taken over most time periods with a similar risk profile.
Low fees generally mean more financially efficient, which means that even if you matched the performance of your current manager, more of your money will remain in your portfolio, compounding and generating extra profit for you.
Of course, it’s a bit too simplistic to simply focus on fees.
The point I’m making is that, by taking the time to balance fees against expected performance (and regularly reviewing your investments), your returns should be higher when comparing the same starting point, investment and duration.
Impact of fees: case studies
Let’s have a look at an example of individual investors:
Sam is aged 45 and has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65.
The total financial services industry cost on their money is 2.5% per annum.
Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was Sam’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value.
You may be surprised to find out that the total Financial Services Industry charges have totalled £345,512 over this time.
It has therefore cost Sam £345,512 to make £467,000 and he has lost eight years of his desired retirement lifestyle.
Paula, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs.
Paula realised that she could get the same returns and same consumer protection for 1.1% per annum.
She also achieved an average 6% return per annum on her money. She achieved a target fund value of £773,000 by age 65 – eight years before Sam.
In other words, they Paula has achieved her target retirement fund value at her projected retirement date with one simple decision; shopping around to get the best fees.
As £300,000 was Paula’s money anyway she has made a profit of £473,000 in 20 years not 28 and it has cost her only £102,000 (not £345,512) to make £473,000 and achieve her lifestyle objective.
If at the time she decided to delay retirement to age 73 like Sam, the fund value would continue to compound and be in the region of £1,128,500 – an additional increase of £360,000.
Let’s look at another example:
Kate is aged 30, has a smaller pension fund valued at £40,000, and is looking to retire at age 65. The average annual return is 7% per annum over the investment period.
The total Financial Services fees are 2.13% per annum and no further contributions will be made.
The fund value is projected to be £203,968 and as £40,000 was Kate’s money already, she has made a profit of £163,968.
The Industry would report how well she has done and Kate may be content with her advisor’s recommendations.
However, it has cost her £74,588 in Financial Service Industry fees to make £163,968.
Daniel, like Kate has exactly the same scenario but shops around and reduces his fees to 1.1%.
Lower fees do not mean lower returns and Daniel also averages a 7% return per annum. Because the fees do not cause such a drag on the returns, the fund value compounds and at retirement age of 65 has grown in value to £291,105.
As Daniel already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.
Kate gave away control of her money to the Financial Services Industry and achieved a fund value of £203,968 to live the rest of her life on, paying £74,588 in fees over the term.
Daniel took back control of his money and achieved a fund value of £291,105 for exactly the same financial return, same financial risk and same consumer protection.
It’s your retirement!
Just by being prudent and understanding the impact these Financial Services fees have on your money you can keep more of your investment for yourself and your future retirement lifestyle – rather than funding your advisor’s lifestyle!
It’s your money – so take control of it and give yourself the option to retire sooner, should you wish.
Hannah Goldsmith is founder of Goldsmiths Financial Solutions and author of ‘Retire Faster’.