Charlie O’Flaherty, Partner, Head of Digital strategy & Distribution at Crossbridge Capital, outlines the impact of fees on an investment portfolio, and tells you which questions you need answered in order to get the full picture.
Now that you understand the fees involved in the investment process, it’s time we took a deeper look at the other aspects of investment fees. The truth is that fees are a negative drag on investment portfolios and this isn’t a new problem. That being said, the banks’ marketing experts have made a valiant effort over the years to convince the investing public that even the highest fees are still quite low or that “you get what you pay for".
To put these arguments in perspective, let’s consider an example portfolio of $500,000 invested for 25 years with an average 7.5% gross return and 1% in total annual fees. At the end of 25 years that portfolio would be worth approximately $2.4 million. If we add an extra 1% of product, transaction and other hidden fees (easy to do), the total 2% in annual fees mean that the same portfolio is worth only $1.9 million. If we do some simple subtraction we’ll see that the extra 1% in fees may actually cost the investor more than his entire initial investment – it doesn’t take much imagination to visualise the impact of even higher fees then.
So what is a savvy investor to do? Assuming you are not inclined to take over the management of your own accounts, you should meet with your advisors and ask them some difficult questions.
— What fees am I being charged other than my Advisory Fee?
— Do you discount my advisory fee to account for embedded management fees and commissions in the products you select for my portfolio?
— Are you applying the fee to cash held in my account? If so, why?
— Do you receive any compensation (monetary or otherwise) from the sponsors of the products you select for my account?
— Are there other administrative or transaction fees in the event that I close my account?
Letting the sunlight into your account statements is always a good idea and any advisor should be willing and able to answer these questions. If yours is not then it may be best to look for advice elsewhere. Keeping yourself well informed about your investment portfolio will help ensure that the fees you do pay result in the best possible returns.
Charlie O’Flaherty is Partner — Head of Digital Strategy & Distribution at Crossbridge Capital. Crossbridge Capital is a global wealth manager who recently launched CONNECT by Crossbridge, Singapore’s first fully functioning robo-advisory platform for Accredited Investors.
The views expressed in this article are those of the author and not the author’s company. This material is provided for educational purposes and should not be construed as investment advice or an offer or solicitation to buy or sell certain securities.