How much are your investments really making?

By David Lamb CFP™ MCSI

One of my major issues with the investment industry is its high charges.

They are often difficult to understand and are frequently hidden – or ignored – due to ‘good’ returns. Just because your money is ‘growing’, doesn’t mean you’re getting value for money.

Charges often include a product fee – charged by the company who provides you with the investment vehicle, a fund charge – made by the fund manager, and an advice fee – payable to your adviser.  

These can be as high as 2% but are often around 1.8%. We aim to get our clients charges to as close to 1% as possible – and sometimes slightly lower.

Remember, the higher the charges the less you have invested. The less you have invested, the less there is to grow. Most importantly, when somebody claims that their charges are high because they give better value for money or provide superior performance, remember that while charges are guaranteed, returns are not.

Here is an interesting exercise for you. Ask your adviser for your fund’s annual returns over the last five years (or Google search your fund’s fact sheets). Calculate the average growth over those five years, then take off the total annual charges. What is your growth after charges?  

For example, average growth over five years of 4% less charges of 1.5% means growth after charges of 2.5%.

Unfortunately though, this isn’t your real growth; you then need to deduct the effects of inflation.

We are currently assuming inflation over the longer term to be 3.25%, but you can make your own assumptions by using data from the Office for National Statistics available at Deduct this from your growth.

Continuing our example, growth after charges is 2.5% less inflation of 3.25% = – 0.75%.

What are your net returns? Is this value for money? Who is making the most from your money? Who is taking the risk – the product provider, the fund manager or adviser?  Whose money is being invested?

Of course, as I’ve explained in earlier articles, there is a lot more to financial planning than investment returns. Are you really getting value for money from the fees you pay?

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