Why do costs matter?

Why do costs matter?

Although you don’t have to be rich to start investing, the money you pay in fees may have a significant impact on what is leftover once they are deducted. The following article will outline the different costs of investing and how they may impact your current investment strategy.

What are the costs of investing?

All investments carry costs, and it is important not only to understand the different types of fees you are being charged but also how to minimise them, where possible. If you are not familiar with the costs incurred as a result of your current investment strategy you may find that over time your returns are significantly reduced as they are eaten up by fees, and therefore may reduce the potential for you to meet your short, medium and long-term goals.

Management fees

The kind of assets you choose to invest in is likely to determine the fees you pay. Funds that are actively or passively managed, pool investors’ money together and use it to invest in particular assets. Actively managed funds are overseen by a fund manager that charges a management expense ratio (MER) which is the cost of managing the pool of assets and is charged to each investor. This may not appear to be a large expense, however, these management fees can have a significant impact on your wealth over time as they not only reduce your returns but also the capacity for that money to further compound in the future.

For example, if you had $100,000 invested and your portfolio earned 6% per annum over the next 25 years, with no costs or fees, you would have approximately $430,000 at the end of this period. Conversely, if you paid 2% every year in costs, which may sound like a small number, you would end up with $260,000 instead. What this means is that about 40% of your account balance would be eaten up by fees, which doesn’t make the 2% sound so insignificant anymore.

Some higher-cost funds may argue that their costs are justified as they enjoy higher returns and stronger performance. However, it is important for investors to conduct comparisons to ensure that this performance is not being drained by fees and just mirroring the performance of similar and potentially cheaper investment options instead.

Source: Vanguard

Brokerage fees

Another fee incurred when investing is brokerage. This is a fee that occurs every time a direct share or similar is bought or sold. This will differ between investors depending on how much is being invested and the trading platform that is being used, but for some trading platforms it is often around $10-20 AUD. If you are trading on a frequent basis, these brokerage costs can accumulate rapidly and have the potential to reduce the returns you generate from your direct shares. However, the longer you stay invested the fewer brokerage fees you are likely to incur and therefore the greater capacity for you to maximise your returns.

Investment or Admin Fees

Another fee that is often incurred when investing is the investment or an admin fee. This represents the cost of using a particular platform to hold, trade or manage your investments. This will vary between platforms and investors should aim to ensure that this fee is proportionate to their investment value, or they may risk their returns being swallowed up by these fees.

Adviser fees

Another fee that you may incur when investing is the cost of engaging with an adviser. Although this may seem like a significant cost, the value a financial officer can provide you is often priceless. This is due to the fact that advisers can help you to avoid making big mistakes that are often costlier in the long term than the cost of the advice. Many advisers charge for their services using a percentage-based model which means that what you are charged increases as your portfolio increases in value. This is usually about 1% of your assets but in dollar terms is about $5,000 for a $500,000 portfolio, and will increase as your investments do. It has been suggested that to break even, financial advisers need to charge at least $3,500 per client, whilst producing a Statement of Advice costs around $6,500. In saying this, engaging with a financial adviser has been found to boost an investor’s returns by around 3.75%.

EPG Wealth follows a flat-fee structure whereby what you are charged remains the same irrespective of whether your portfolio increases in value. To read more about our transparent fee structure and packages available, click here.

How can you reduce these fees?

It may be easy for investors to regard these percentages or ‘one offs’ as inconsequential, however, although they may seem small in isolation they can compound over time and leave you in a worse position than if you had shopped around for a better option.

A key lesson for investors to learn early on in their investment journey is when to buy and when to hold. The more often investments are bought and sold, the more often you are likely to accrue expenses. It is important to maximise your time in the market, instead of timing the market, however, if you do wish to strategically time when you invest and when you cash out, it is important that this occurs when the market conditions are optimal.

Another consideration for investors is the tax implications of selling their investments. Making a return on an investment triggers a CGT event. However, this tax which is paid at your marginal rate is reduced by 50% if you hold an investment for longer than 12 months. It can also be offset by capital losses you may have made. Therefore, it is also tax effective to follow the long-term investment strategy instead of constantly buying and selling particular investments. To read more about how CGT works, click here.

Another key takeaway for investors is to ‘do your homework.’ This entails conducting comparisons and doing research about the particular investments you are interested in and that align with your goals and how they shape up against other similar investments. This could include reading the fine print and looking at previous reports and investment performance. Although past performance is not necessarily indicative of future performance, this simple activity could end up saving you a significant amount in fees. Hence, helping you to maximise your returns and grow your wealth over time.

At EPG Wealth, this process is integral in our approach and is carried out for all client’s accounts, in turn ensuring that all clients we service are in an optimal investment option whilst minimising their fees as much as possible. If you would like assistance from a financial advisor that can review your current fee structure and strategies to help you reduce them, please click the link to organise a complimentary 20-minute phone call with an EPG Wealth adviser today.

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