In depressed economy returns on various investments are weak if not negative. The South African Stock Market year to date is -2,3% with a total return of 0,6%. Fees become more noticeable when returns are low as they appear to reduce your returns leaving less for income and or growth into the future.
Fees are effectively a reduction in yield
Which means that if you earn 10% and your total fees are 2%,you get 8%. To get an idea of the impact of fees over time – R100 rand over 10 years gets you R20K @ 10% and R18K @ 8%.
Here are the components of fees:
The Service Provider of your investment Charges on average 0,5% per annum for the administrative work needed for your investments. Providing information and technologies to keep you in touch with your investment.
The Financial advisor who helps you to make appropriate choices on your investments can charge up to 1% per annum on the value of your fund.
The Fund manager who you investment according to a specific objective which you decide to invest in charges between 0,5% and 2% depending on the type of fund.
SARS also has a part to play on reducing your yield as all the fees have VAT applied at 15%. SARS also taxes your returns and collects on capital gains as well.
You could save on advisor fees by investing directly. The downside is that you could end up with an investment which costs you more because of wrong choices.
You could save on Fund manager fees by investing in passive funds. Investments like Exchange Traded Funds and tracker funds offer the average performance of the basket that they represent. The cost is generally lower. The downside is that your returns will never be better than the average.
You could save on Tax by investing more wisely in certain ways to limit taxes. You will need a good understanding of the various tax breaks on certain investments to take full advantage.
It comes down to the value you perceive. It’s not only the returns that you need to be focussing on when assessing fees. The value proposition also lies in the appropriateness of the investment aligning to aspects like tax advantages and avoidance of estate duty and other costs. There are certain structures which improve your investments in more ways that returns.
So be aware of the full value proposition of your fees. They are justified if they add more value to your investments than you can.