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How fees impact your investment return over a lifetime

July 17, 2023
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An insight into fees and how they affect your portfolio value over time

A question every investor should ask is what fees am I paying for this investment. 

John Bogle, the founder of Vanguard said. "What happens in the fund business is that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It's a mathematical fact"

This is very true as everyone always talks about the returns, but they are referring to the gross returns. The returns investors should be concerned about is net return. This is the return after taking into account all fees. 

Let's take a look at the typical fees charged in the unit trust industry to clarify the question, what fees am I paying? Then we will make comparisons of how different fees impact an investment. 


 

Types of fees

Broker fees:

For making use of your financial advisor, they will typically take a percentage from your investment. This could either be an upfront/initial fee that takes a percentage of your investment upfront, and the rest is invested. Or they will take an annual advice fee for service rendered. 

Administrative or platform fees:

Administrative platforms charge a fee for doing admin work on your investments. The admin fee usually works on a sliding scale depending on the size of your investment. It works on a percentage scale, reducing as the investment amount increases. There is no set fee, so ensure you are not paying or paying a minimum fee for this.

Fee break down for investment types for unit trusts and ETF:


 

Unit trustsShares and etf
Management feeBrokerage
Performance feesSettlement and administration
Other fees (audit, custody, trustee, VAT)Monthly platform fee
The above fees give your total expense ratio (TER) 
Transaction cost 
Total investment charge (TIC) 


 

The average investment fee in South Africa is 1,5%, 0.5% for administration fees and 0.75% for advice fees totaling up to 2.75%. Some managers may even ask for a performance fee above these fees. Ensure that you are getting value for money if you are paying. 


 

Comparison of fees on an investment over time

We took an investment amount of R1m, with a gross return of 12% per year over a 30 year period. The only difference we implemented between these two was the annual fee of 0.50% vs 1.5%. This annual fee could be a make up of fund fees as discussed above or annual advisor fees, but for illustration purposes it's just a 1% difference. 

The difference over 30 years on end value is an astounding 31.16% in investment value!! 


 

In summary

With plenty of platforms, and funds available in South Africa, ensure that you are getting value for your money. By comparing your fees to the average fees charged in South Africa.

The tool used in this article is available for download at : https://finsesh.com/tool/Fees

Onward to Financial Independence 

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