For those of us contributing diligently toward our retirement we generally believe that by starting early, contributing as much as possible and choosing funds with good performance track records we are doing all we have to… but are we really?
We rarely pay close attention to the costs we incur when choosing our investment platforms and even our financial advisors. The cost differential between product providers and financial advisors can be significant and could add between 0.50% and 2% to your annual costs. While this may not seem incredibly significant in a single period, when one considers the effect over a number of years one begins to see the dramatic effect even a small percentage of costs could have on your future capital.
The investment platforms do improve the ease of administration and accessibility to various investment options. Financial advisers can add significant value to your investment portfolios and financial planning and can help you to focus your mind periodically in assessing whether your portfolio is achieving your investment objectives. Both these parties deserve to be compensated for the services they provide but it is your responsibility to ensure that you are paying a fair price for the service you receive.
The above table indicates the effect that an incremental 0.50% increase in costs will have on returns over 10, 20 and 30 years. Here we assumed that R 1,000,000 is invested on day one and the initial return is 10%.
The point here is that an additional 1% in annual fees equates to a 1% decrease in annual returns. Just as compounding can be a powerful force to increase your wealth over time it can also destroy your potential future capital when it is working against you.
There are many ways of investing in market instruments – make sure you are using is the most cost effective one!
