They warned me not to do it… but of course being pig-headed, I didn’t listen.
Five months pregnant with my first baby we signed up for a loft conversion… converting the top of the house into a huge bedroom so the smaller lower level bedrooms could be used for the coming spawn.
We hired Mark the Builder with a BMW to take care of it and agreed on an all-in price to take the roof off, add on a posh room and bathroom and put a gorgeous new roof back on.
Now we like to think we aren’t fools. We went over the arrangements with a fine toothcomb.
We wanted to make sure the price included windows, doors, insulation, guttering etc. Yes, yes.. it included EVERY cost for the loft.
With the baby due any minute the loft conversion was nearing completion, but guess what, there was no staircase… Mark the Builder wanted another £10k to build a staircase to connect the loft to the rest of the house. What!!!!!! It wasn’t included in the loft price as technically it’s not part of the loft.
With a baby nearly due and the noisy builders driving the 8.9 months pregnant wife crazy, there was no choice but to hand over more cash….
Investment fees are a bit like the staircase we ended up over-paying for … a critical component that is often unmentioned or brushed over by investment managers.
The FCA – the UK financial watchdog brought in strict rules to reduce and make more transparent the fees paid by ordinary investors… but still estimates that these investors pay 2.5% - 3% of their portfolio in fees each year.
It’s your money – you have a right to ask questions and shop around. Nothing in investing is free so check carefully.
Why should you care about fees
The US government’s watchdog, the SEC Office of Investor Education and Advocacy gives the example of a portfolio of $100,000 that earns 4% on average for 20 years. The portfolio will be worth $210,000 with annual fees of $0.25% but only $180,000 with a fee of 1.0%. That’s a $30,000 difference on a relatively small amount.
Why you should ask about your fees
As a consumer of investment services you have a right to ask about fees and should shop around for something that sits comfortably with you.
What are the various type of fees (I do not claim this is an exhaustive list)
One of the problems with fees is that ordinary investors are unaware of the various types of fees… they might be told about some but not others. Look through the list below and use it as an initial checklist:
Types of fees:
Platform costs – costs to use any technological platform your investments might be based on
Foreign Exchange charges – if the fund you’re invested in holds investments abroad, there will be foreign exchange transfer charges
Transaction costs for underlying investments – the cost of buying the actual shares/ bonds that make up individual funds
Expense ratio or internal fees – the cost of creating a fund
Investment advisory charges – the cost of an advisor telling you which fund to hold
Front end load – costs when you initially buy an investment. Find out if these are billed to you or just taken out of your investment.
Back end or surrender charges – costs associated with selling/leaving a fund, especially if you do so under a minimum time period. Best to know about them before you invest.
Annual Custodian fee – annual charges to keep certain accounts open and in compliance with government rules
Commissions – fees paid to investment advisers and people giving financial advice to promote certain investments or brands. This is a sticky one to ask about, but you have to be satisfied with how the people advising you are being paid.
If you have other types of investments …. Hedge funds, private equity, real estate… the scope of additional fees increases…..
What are the main questions you should ask about your investment fees?
Do you have a full schedule of fees you can share?
Is everything listed? Refer to the list above….
What fees are one-offs? Which fees are recurring annually?
What fees are paid at the beginning of an investment?
What fees are paid when you withdraw your money?
You can find a more detailed document below.
I found this article in the Financial Times very helpful:
I hope this helps you start thinking about reducing the costs of your investments and thereby increasing your overall return.