In this article we took a good look at the fees you are likely to be faced when seeing a financial planner – sure, some say (not us) these fees might be “justified” as you are paying someone for their time, education and experience. However, there are hidden fees often associated with a financial planner that may seem small on the surface but could kill you in the long term.
What are the hidden fees?
The fees below are in addition to the ongoing fee you might be paying an advisor:
- Wrap account or investment platform – So what is a WRAP? A WRAP (or investment) platform is an administrative tool (paid for by you) that makes a financial adviser’s business more efficient.The fee includes all administrative, commission, and management expenses. A WRAP account could add anything from 0.5% – 2.0% to the annual cost of managing your money.
- Management expense ratio (M.E.R.) – If your financial planner recommends you invest in a managed fund (which plenty do) this is the fee you will be charged by the fund manager. The fees can vary from 0.3% – 2.5% depending on how active and complex the fund.
It’s only 1% – who cares?
What is 1%? If I gave you $100 and took $1 you probably wouldn’t care. We all think like this – but it is an expensive way of thinking. These small fees compound in a hurry and can really add up over time. Using an example – let’s assume you find an invest that returns 8% every year for the next 20 years on an investment portfolio of 100,000. The chart below highlights what the ending value of this portfolio would be at differing levels of fees:
Over a 20 year period, an extra 1% in fees removes around 8%, or $40,000 in the final value of a portfolio. The 2.5% fees could eat out almost 40% of your investment over the period. This impact is the most pronounced with your superannuation (we discuss this here) as the combination of a large investment horizon, and exorbitant fees, eats away heavily at your retirement nest egg.
What can you do to avoid these fees?
Avoiding these fees is easier said than done. Unless you have investment experience it is very difficult to know where to start when investing your hard earned savings so it is natural for one to seek help. Some of the keys things to do are:
- If you are going DIY (good on you!) then make sure you read the Product Disclosure Statement (PDS) attached to any fund you choose very carefully. We know – it’s 100 pages and boring as bat s**t but it has to be done!.
- If you are going use an adviser, try find one who recommends low cost alternatives such as Exchange Traded Funds (ETFs).
- Make sure the adviser you use isn’t using a WRAP platform.
- Avoid any funds that charge entry costs, exit cost, redemption cost and transaction fees.
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