Corentin Scavée
14 Mar 2024
1% less in fees could mean 500.000€ savings in 40 years
When investing, the impact of fees on returns is often neglected, overshadowed by the promises of great performance made by financial advisors. While it is normal to pay to be advised and to invest, applicable rates in Belgium can be inflated by a factor 5 for similar investments. Expressed as a percentage, fees may seem irrelevant. A 1% increase has nevertheless a significant impact on the long-term value of your investment portfolio.
Same investment, different fees
To illustrate this situation, let’s consider John and Paul, two very lucky brothers who each receive 100.000€ on the day of their 25th birthday. Both decide to invest this amount over the long term in a diversified portfolio of global equities. John only pays 1% all-in to get advice and invest his wealth online. Paul pays 2% for similar services with a traditional bank.
A difference of 500.000€ down the road
At retirement at 65, they are both delighted with the wealth accumulated thanks to the growth of global equity markets. With a net annual return of 6%, Paul now has 1.000.000€ on his account. Although this is a substantial amount, Paul is frustrated. Indeed, by saving 1% per year on expenses John has obtained a net annual yield of 7% which has generated a capital of 1.500.000€ without taking more risk than his brother.
Where do these 500.000€ come from? The magic of compound interests
The percentage saved by John generated an additional 1.000€ in the first year. These 1.000€ then grew at a rate of 7% giving 1.070€ after one year, 1.145€ after two years, and so on for 40 years to ultimately generate 14.000€. This snowball effect, called compound interest, was repeated every year for 40 years on ever larger amounts that accumulated, creating a difference of 500.000€ between the assets of the two brothers.
More visibility on fees paid out as of 2019
Great news! The fuzziness around investment fees will disappear as of 2019 as financial institutions henceforth have to report on an annual basis on all fees charged to their customers. This report will enable investors to get a clear view on how much they pay and to benchmark with other financial institutions.
This does not yet provide sufficient transparency
More visibility in 2019 yes, yet transparency remains limited. The absence of rules defining the presentation of these costs allows financial institutions to muddy the waters. Among management fees, deposit fees, brokerage fees, entry fees and taxes, it can get really complicated to determine which exact percentage you actually pay. Don’t get discouraged, easyvest can help you in this by offering you a free audit of your portfolio.
Decrease your fees with easyvest
Avoid losing money by paying excessive fees, just as John did. easyvest helps you building a personalized investment plan maximizing your return and minimzsing fees, as of 0,5% per year all-in.
Note: This article was written when Easyvest was authorized and regulated by the FSMA as an agent in banking and investment services.