Reducing your fees as much as possible is the single biggest action that you can take to maximise your investment returns.
A small investment fee might not seem like a big deal, but it can be hugely damaging to your overall investment returns. This is because the impact of fees is compounded across each year of your investment plan; When you pay money in fees, not only do you lose the money that you pay directly for those fees, but you also lose the extra money in the future that this initial fee money would have generated as a result of the compounding interest.
Let’s look at an example. Imagine you invest $1,000 and the market growth rate you experience is 7% a year for 20 years. This is what the outcome would look like with 3 different fee options: Firstly, no fees. Secondly, a 0.5% fee charged each year. And finally, a 2% fee charged each year.
If you paid no fees at all then your final investment value would be $3,900. Your investment returns would be $2,900, almost triple the value of your initial contribution of $1,000.
However, when you start to pay fees, you can quickly see how they eat up into your investment returns. If you pay 2% fees a year you would end up with only $2,600. You’d lose about a third of the final investment value, and this is because your investment returns would only be $1,600 (or 55% of the investment returns if you paid no fee). Fees of 2% a year don’t sound high at all, but they actually eat up about half of your investment returns!
… hidden dragon
Unfortunately the story gets even worse - not only do these fees have a surprisingly large impact on your investment returns, but many of them are also often hidden. As well as the upfront fees that financial advisors charge directly, they also typically get paid by the product providers of the financial products that they sell. In a world where money grows on trees, this obviously wouldn’t be a problem... In the real world, however, product providers are only able to afford these additional payments to financial advisors by charging a higher fee back to the end customer.. i.e. you! And unfortunately, despite being banned in other parts of the world, such as the UK, these types of payments are common across Asia. In the industry they are referred to as Trailer Fees.
As a result of trailer fees, therefore, financial advisors in Hong Kong and across Asia are incentivised to sell products that pay them the highest fees, despite the fact that these are the very products which offer the worst value to their customers.
The emergence of Exchange-Traded Funds (ETFs)
Fortunately, however, the final twist of the story is a good one. Exchange Traded Funds (ETFs) have now emerged onto the scene, and they have removed trailer fees entirely. Average annual fees for ETFs are about 0.5%, which compares to an average annual rate of 1.5% for traditional mutual funds, which include the advisor trailer fees. The Tracker Fund of Hong Kong is the lowest cost ETF here in Hong Kong, and its annual fee is just 0.1%.
There’s been an explosion of growth in ETFs since their launch just some 30 years ago, and there’s now about US$7tn of assets managed in ETFs around the world. This growth has come about because investing in ETFs represents the lowest cost way to invest in the market, and lowering your costs is the single biggest action that you can take to maximise your investment returns.
At Teyk we only offer ETFs. We receive no trailer fees and no sales commissions of any type, and so this ensures that any recommendation we make to customers remains completely independent from our business revenue model.