A very important concept that investors typically find hard to grasp is that the less they pay to invest the better their long-term net returns will be. Adds value.
It’s perfectly understandable that people struggle with it. After all, with almost every other product or service we buy, the more we pay the better it is. With investing it works the opposite way round. That’s why another key role of an adviser is to keep a very tight control of your costs.
Research has repeatedly shown that low-cost funds outperform higher-cost alternatives. What really matters is your net return — in other words, the returns you actually keep for yourself. It’s simple arithmetic. Net return equals gross return minus costs.
So, every pound or dollar or euro you pay in costs is a pound/ dollar/ euro taken off your potential returns. And because costs compound over time, an adviser who keeps those expenses to a minimum will help you to reap considerable rewards over the long term.
A big problem for investors is that the fund industry is very clever at keeping costs hidden, or else making them so complicated that they’re almost impossible to compute. Few people have the time and patience to compare the various fees and charges; even fewer actually read the small print. An adviser with a trained eye will ensure you don’t pay any more than you have to.
Beware, many advisers will try to play down the importance of cost. They will tell you, for example, that it’s worth paying more to invest in high-fee, actively managed funds that they believe will outperform the market.
However the evidence clearly shows that, after costs, only around 1% of funds consistently outperform the market and that identifying them in advance is all but impossible. Sure, it can be very tempting to put your trust in an adviser who claims to knows who the “star” fund managers of the future are. But you’ll be paying far more in fees and charges over the years, and that will make a huge difference to the size of your retirement pot by the time you need it.
Remember, the less you pay, the more you keep. It really is as simple as that.
This video on cost control is the second in a five-part series of videos called The Value of Advice, made by Regis Media, the producer and sponsor of The Evidence-Based Investor. The videos are intended for use by advisory firms to help them communicate their worth to clients and prospective clients.
If you’re an adviser, and you would like your own version of the series, in your firm’s branding and carrying your contact details, and perhaps a call-to-action and disclaimer, please get in touch with Sam Willet at firstname.lastname@example.org or Christina Waider at email@example.com. Alternatively you can call us on +44 (0)121 285 2585.
The Value of Advice is one of three pre-produced video series currently available to advisers, the others being Six Steps to Successful Investing and Evidence-Based Investing Insights. All three series have been tailored to different markets — principally the UK, Ireland, the US, Canada, Australia and New Zealand. They are also available in Dutch and in German.
Part 1 – Asset Allocation