KOLLIG: Investment Fees: Small fees have a big impact on your investment

HAVE you ever stopped to think about the effect of fees on your retirement savings? Most clients don’t even know what their investment fees amount to in rands and cents, let alone understand the impact thereof on their investment returns. The principle is simple really: “The less you pay in fees, the higher the net return on your investment.” I am not suggesting that you only go for the cheapest option but I do believe that you should get value for your money. Whether your adviser or product provider offers you such value can only be determined by you if you have a clear understanding of the long-term impact of such costs.

Example:
Mr Retired has a living annuity with investment platform A. The fund value is R3 600 million from which Mr. Retired is drawing an annuity income of R18 000 per month. The platform administration fee is 0.444% per annum of the fund value. Assuming that all other costs are the same on both platforms, Mr Retired will save R7 767 in the first year if he transfers his living annuity to investment platform B, where the administration fee is only 0.228% per annum.
However, Mr Retired is not convinced. After all, transferring his investment is a lot of trouble for such a small amount. So Mr Retired’s adviser shows him the significant impact of this small amount on his investment when compounded over a long period of time.
Over a 20-year period the platform administration fees of the two platforms and the cumulative effect thereof on his fund value will be as follows (assuming returns of 10% per annum after advice – and fund manager fees and a 6% increase per annum in annuity income):

Apart from paying R184,066 more in administration fees on platform A, his fund value on platform A is R512,555 less; a financial impact on Mr Retirement of R696,622! Viewed from this perspective, going through the process of transferring one’s investment doesn’t seem like much trouble at all.

If you have never looked at the fees you pay in more detail, maybe now is the time to determine the financial impact of the various fees on your investment and to ask yourself whether the quality of service you are getting, justifies the fees you are paying.
* Koos de Wet CFP is a financial planner at PSG and a member of the Fiduciary Institute of Southern Africa. Readers can send enquiries to koos.dewet@psg.co.za