Why high investment fees are a barrier to financial freedom

Financial advisers should be committed to raising awareness about more cost-effective investment solutions

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Have you been working for years for your bank or financial services provider?

The answer lies in a study by the European Consumer Council that has highlighted a striking opportunity in the world of investments.

It reveals that people could potentially achieve significant savings over a lifetime by switching from traditional bank-offered solutions to more cost-effective and efficient investment alternatives such as online trading platforms.

These savings are so substantial that they could translate into the possibility of retiring years earlier than planned.

The financial sector has faced criticism for prioritising short-term gains over long-term benefits to clients and society.

This is often also seen in the compensation models offered by banks and service providers to their employees, which should be questioned as to whether this is in the interests of clients or the bank and its staff.

This trend has sparked a movement among consumers, who increasingly opt to switch between banks and other more cost-effective wealth and investment providers.

This shift is supported by technological advancements and a growing awareness of the need to evaluate the services and, not least critically, the costs offered by banks, especially those within the investing community that have been traditionally overlooked.

Compounding effect of fees on investment returns

Understanding the compounding effect of costs and fees on long-term investment returns is crucial. Even seemingly small fees can significantly erode the value of an investment portfolio over time.

For example, a 2 per cent annual fee may sound insignificant, but over a period of 30 years, it can reduce the potential value of a portfolio by more than 50 per cent.

This impact is due to the power of compounding, where not only investment returns accumulate over time, but the costs and fees as well.

This means that every dollar paid in fees is a dollar that is not earning returns in the growth of your portfolio.

Over long periods, this can have a dramatic effect on the wealth-building potential of investments.

Therefore, selecting investment options with lower fees can significantly enhance the long-term growth of an investor’s portfolio.

It is a relatively simple concept: The fewer fees on your portfolio, the larger the portfolio value and the greater the power of compounding!

In diverse regions, regulatory authorities have recognised the emergence of cost-effective alternatives to conventional investment funds.

Notably, index funds and exchange-traded funds (ETFs) have gained prominence as attractive options.

These investment vehicles, which track market indices such as the S&P 500, Nasdaq and Dow Jones, provide a feasible and more affordable avenue for investors.

However, the widespread availability and subsequent adoption of these alternatives exhibit significant disparities among different countries.

The ramifications of opting for more efficient investment solutions carry profound implications for investors.

Beyond the potential to reduce the retirement age, the accumulated savings from embracing these alternatives can substantially elevate lifestyle choices.

This could translate into the ability to make significant financial decisions, such as acquiring a holiday home or indulging in extended family vacations.

The shift towards cost-effective investment options not only affects individual financial trajectories but also contributes to a broader paradigm of financial accessibility, empowerment and independence.

Investment advisers and financial service providers ought to be committed to raising awareness about more cost-effective investment solutions.

Unfortunately, too many have prioritised short-term revenue targets from advisory and execution fees over a longer-term view of client loyalty and increased client assets.

If advisers and service providers take a longer-term view, there may be a short-term impact on lower immediate revenue.

Still, there will be upsides of increased recurring revenue as happier clients stay with their providers and their portfolios grow due to this compounding nature of portfolio assets.

Some of these custody fees, which are typically charged as a percentage of your portfolio size, will grow in value as the client’s portfolio grows.

Suppose your provider offers securities or stock lending services. In that case, increased portfolio holdings increase the probability of revenue from lending, from which both the client and the company typically benefit.

Hence, the industry should be looking to do the right thing for the longer term, rather than what we have seen for many years, which is focused on short-term gains, often at the expense of their clients.

People must be encouraged to reflect: Is the service and advice from your current bank worth the equivalent of working additional years? If the answer is no, then it might be time to explore alternatives.

Damian Hitchen is chief executive of Saxo Bank Middle East and North Africa

Updated: March 06, 2024, 12:12 PM