The impact of fees on investment returns
Do you know the impact that investment fees can have on your returns? The effect of fees on investments can knock thousands, or even tens of thousands, off your returns over time. Here’s why.
Do you know how much you’re paying your investment manager each year? Do you know how much you’re paying in platform fees? What about performance fees? And ongoing charges?
If the answer to any of these questions is ‘no’ or ‘not sure’, then you aren’t alone. Fees have been described as the ‘silent enemy’ for investors, and that’s because they can have a huge impact on your investment returns. And yet, it’s one of the features of investing that an investor can control.
The impact that high fees have on investment returns also worsens over time. That’s because each year, an investor is left with slightly less in their investment pot than an equivalent investor paying a smaller fee. The pot of the investor paying higher fees is continually held back, meaning there’s less to put to work generating returns. That underperformance builds up over time.
Let’s look at an example:
Ryan and Sarah both have £15,000 that they decide to invest. Ryan puts his £15,000 into an actively managed large cap UK equity fund, which delivers an annual average return of 6% before tax. But the total cost of this investment is 1% a year. Over 35 years, Ryan’s pot has grown to £84,018, and he has paid £31,273 in fees.
Sarah, meanwhile, opted to invest her £15,000 in an exchange traded fund (ETF) that aims to replicate the performance of the FTSE 100. Its ongoing charge is just 0.1%. 35 years later, Sarah’s pot has grown to £111,324, assuming an annual average return of 6%, and she has paid just £3967 in fees.
Let’s look at another example. Samir and Jo both invest £10,000 for 20 years, and achieve a 5% return per year. However, Samir pays 1% in fees and Jo 2%. Samir’s pot grows to £21,911 after 20 years, while Jo has grown to just £18,061, a difference of over 20%.
In both examples, the impact is clear. Fees alone can wipe thousands, and even tens of thousands, off your investment returns.
The good news is that regulators are forcing the UK investment industry to become more transparent about fees, and the advent of online, passive-investment platforms means it has never been as cheap, or easy, to invest.
So control the one thing you can control when investing, and ensure that fees are not your silent enemy.