Many business people could fulfil a dream of early retirement if they made a point of reviewing the fees being charged on their retirement and investment plans.
The way the Financial Services Industry gets paid for the advice they offer and the work they do setting up and managing funds and portfolios is by charging fees on all investment products. There is nothing wrong with that in principle. The problem is that most people have no idea what these fees are, and have little if no understanding of the impact these fees have on the value of their retirement fund.
I don’t know of any other situation where individuals buy a service without understanding the full impact of the costs they will pay. If short-changed in a shop most of us will raise the issue immediately. We regularly search online to make savings on a purchase or to compare home contents or car insurance and energy suppliers to get a better deal.
When it so important to us and the lifestyle we can achieve in retirement why don’t we shop around on fees? After all, if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
There is no question that we should be able to do this for our retirement and investment plans as well as other purchases.
Regardless of how much money you have or your age, high industry fees can delay you reaching the day you had hoped to start your retirement. With the changes implemented in the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on the 3rd January 2018, investors have never had so much information available to them. Investors now have the power to take back control of their money from the Financial Services Industry and do what’s right for them.
This is the crux of the problem; if we do not know how much is it costing us in total Financial Services Industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Here is an example to illustrate the issue:
Our first investor is aged 30, has a smaller pension fund valued at £40,000, and looking to retire at age 65. The average annual return is 7 per cent per annum over the investment period. The total Financial Services fees are 2.13 per cent per annum and no further contributions will be made.
The fund value is projected to be £203,968 and as £40,000 was our first investor’s money already, she has made a profit of £163,968. The Industry would report how well she has done and she may be content with her advisor’s recommendations. However, it has cost her £74,588 in Financial Service Industry fees to make £163,968.
Our second investor has exactly the same scenario as our first investor but shops around and reduces her fees to 1.1 per cent. Lower fees do not mean lower returns and she also averages a 7 per cent return per annum. Because the fees do not cause such a drag on the returns, the fund value compounds and at retirement age of 65 has grown in value to £291,105. As our second investor already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.
Our first investor gave away control of her money to the Financial Services Industry and achieved a fund value of £203,968 to live the rest of her life on, paying £74,588 in fees over the term.
Our wiser second investor took back control of her money and achieved a fund value of £291,105 for exactly the same financial return, same financial risk and same consumer protection.
Which of these scenarios is closest to your situation?
Just by being prudent and understanding the impact these Financial Services fees have on your money you can keep more of your investment for yourself and your future retirement lifestyle – rather than funding your advisor’s lifestyle!
As the example shows our second investor achieved her target retirement fund value at her projected retirement date with one simple decision; shopping around to get the best fees.
Always remember: It’s your money. Take control, understand the details and give yourself the flexibility to retire when you want to and perhaps even enjoy the luxury of early retirement.
Hannah Goldsmith DipPFS, Goldsmith Financial Solutions