• ETF Enthusiast

Fees Matter

We all want to retire with enough money to be able to live off for the rest of our lives and be comfortable right. That’s why investing is so important, but there are many things out there that can significantly affect the return on our investment over time and one of the main ones is fees.

The effects of fees on an investment are significant and best displayed through numbers so let’s look at some examples:

I have run a simulation on a 20 year investment

Monthly Investment: R1000

Yearly escalation in investment contributions: 7% (this equates to a total of R479 736 in contributions over the 20 years)

Estimated yearly return on investment: 15% (this is based on the JSE’s average return for the All Share Index in the last 10 years)

Fund 1: Fees charged - 1% per year

Investment worth: R 1 818 443

Fund 2: Fees charged - 2% per year

Investment worth: R 1 636 454

Fund 3: Fees charged - 3% per year

Investment worth: R 1 474 941

In this case the 2% difference in fees between fund 1 and fund 3 leaves you with a shortfall of R343 502 on your total investment after 20 years, with fund 1 having accumulated around 23% more money than fund 3. This however escalates even further the longer you are invested:

Let’s continue our investment for another 20 years (this equates to a total of R2 333 529 in contributions over the 40 years)

Fund 1: Fees charged - 1% per year

Investment worth: R 32 028 554

Fund 2: Fees charged - 2% per year

Investment worth: R 25 189 563

Fund 3: Fees charged- 3% per year

Investment worth: R 19 935 272

After another 20 years invested (this person must have started very young) the impact is a difference of R12 093 282 between funds 1 and 3, the individual invested in fund 1 having over 60% more money to retire on than the individual invested in fund 3.

I started a retirement annuity at the age of 22 which had an amazing deal (or so I thought); this was that they would match all contributions made by me over the full period in a ‘bonus’ additional payout when I retire. This sounded amazing... This company was actually basically paying me double right? I thought this until I discovered that the fees I was paying was an astonishing 3.5% per year. This took me over a year to realise as it was clearly something they weren’t trying to advertise, you cannot even find the fees info on the website where they offer the product, and I had to do some serious digging in order to find it (this is a very well known insurance and investment company in South Africa).

So what if I had taken this option and decided to stay with it until I retire? Let’s use the same investment criteria as the previous examples for a 40 year investment (I decide to retire at 62, hopefully this won’t end up being the case!) and given that the fee is 3.5% per year my investment at the end would be worth R17 780 493 (in 40 years monetary value which will be worth significantly less than it is today) I will also get the “big bonus” I was promised which is an additional R2 333 529 as this is what I contributed to the fund over the last 40 years. This brings my total investment to R20 114 022. We can already see given our earlier example what a disastrous result this would be, as a fund giving the same return but charging a 2% fee per year would have given me over R25 million in the same period and a 1% fee giving me over 32 million.

Once I realised how I was being scammed I quickly made the switch to an even more trusted asset manager charging a fraction of the fees (about 1.2% with some performance fees built in for over or under performance), but I still wonder if this is good enough. There are funds out there that offer index tracking (my style of investing) retirement annuities with even less fees than this. I just am slightly worried my financial advisor would kill me if I ask him to do all that paper work again - the process for transferring retirement annuity funds is really not for the faint hearted (sorry Jamie). I do still feel the tax benefits of retirement annuities make them worthwhile investing in but I think a serious decision needs to be made when weighing up fees versus a trusted brand in these products, and there are some very trustworthy businesses offering exceptional fees (10x and Sygnia to name a few).

I think this issue definitely goes beyond investing, but with an industry as full of smoke and mirrors as the financial services industry is they thrive on complexity and a lack of transparency. Let’s reward the companies who are fighting against this and are trying to make investing an easy and happy process for all involved.

ETF Enthusiast

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