When choosing where to invest your pension or personal money, you should think carefully about the investment costs and not just the potential for profit. Sometimes fees, or the costs of your investments, can slip under the radar the bit, particularly when returns are strong as they have been in recent years, but if you’re not careful, fees and charges can erode your investment returns by a significant amount over time.

Strong recent returns and relatively high valuations give rise to an increasing expectation of more modest market performance over the next few years. Volatility is also increasing, and these factors leave investors more exposed to the impact of high charges on funds. Indeed, as investors begin to scrutinise their actual returns over a number of years, you may start to question the value you are getting for the charges you are paying, as well as the suitability of your investments.

One of the biggest challenges with charges is the fact that there appear to be many (sometimes poorly disclosed) component parts that make up the total charges that you are paying. The charges you pay include custodian charges, fund management fees, transaction charges, and often commission paid to your financial advisor. When added together with other smaller charge elements, these can end up having a significant impact on your investment returns at the end of the investment period.

A 2012 government report found the average charge on a pension fund was at least 2.18% p.a. Would it make much of a difference if you could reduce your annual charges by say, 1%? We believe it would, and that in most cases it can be done.

For example, consider an investor with a current pension fund value of €100,000, who is continuing to pay in €2,000 each month. We’ve also assumed that the good times continue to roll, and this investor is earning 6% p.a. gross before charges. Now let’s assume this investor manages to reduce their charges by 1% p.a., what impact will it have?

  • After 5 years, this investor will be approx. €10,000 better off, increasing their fund value by about 4%
  • After 10 years, this investor will be approx. €34,000 better off, increasing their fund value by about 7%
  • After 15 years, this investor will be a whopping €81,000 better off, increasing their fund value by about 10%

Seemingly small percentage amounts really add up, particularly over time as is the case with pension funds. The questions you need to ask yourself are,

  1. What are the charges levied on my pension fund?
  2. Are they fair and good value for me?
  3. Is there a better way of paying for the services?

To answer the first question, you would need ask your advisor for a full break down of all fees that are being charged on your investments. It makes sense to seek an explanation of all the charges applying to your fund. You then need to apply this % amount to your funds today, to see what you are paying. Of course, the monetary amounts you are paying will increase in line with your growing funds to significant amounts over time, as can be seen from the example above. Then moving on to the second question, through understanding the funds that you are invested in, and the services provided by your advisor, relative to other options that are available in the market, you can make a judgement call in relation to the value you are getting.

To answer the third question, you need to consider alternative ways to pay for the services you need – imagine if you could significantly reduce the €81,000 in our example being deducted from your fund! We believe there are two areas you should look closely at.

First, and assuming you have a suitable investment plan in place to meet your objectives, you need to discuss the fund charges that are being applied. Are there lower cost alternative investment fund options that can deliver similar results? Or can your advisor secure lower pricing from investment fund managers for your benefit?

Then you need to have a conversation with your advisor about their fee. If this is calculated as a % of your fund, are you happy with the amount, particularly as this will increase in line simply with investment growth – with little or no real increase in the added value delivered by the advisor? Are you happy to pay this increasing amount? Or would a fee-based approach make more sense for you, where a clear and stable “Euro amount” fee is quoted, as opposed to a less transparent % amount that will vary in line with your funds?

With a fee amount you know exactly what you are paying each year. You also know the service that you are receiving from your advisor each year. You can then make a straightforward judgement about value.

Seemingly small amounts add up. Every 0.1% that you can shave off your total investment or pension plan charges will have a big impact, particularly over time and as your investments grow. Insist on full transparency about what you are paying to all the various service providers, and seriously consider a fee-based approach for crystal clarity in relation to your adviser’s charges.

If you would like to understand how Acuvest helps investors and pension fund holders to minimise the impact of charges on their pension funds, please contact Aengus Moran, Investment Advisor, on 01 634 4807 or email directly at aengusm@acuvest.ie.