In our regular column, Money Matters, SIMON PARFITT of Pyrmont Wealth Management answers your burning questions on finance. Here, he provides guidance on costs to be aware of when considering investing your money.
The price of investment
When it comes to investing, the underlying costs of your investment have a huge impact on how well your money will grow. It’s a bit like handling a bar of soap; the more it’s touched, the less there will be! These fees can often be difficult to fully understand and can be charged at both the product (or account) level and at a fund level inside the product/account.
Here are a few of the main costs to look out for:
Reduction in Yield
If you’re buying an insurance-linked investment product (these are still very popular with local insurance agents, often under the guise of saving plans), you should ask what the “Reduction in Yield” figure is. This figure shows the effect of the total charges applied to a policy and it’s not uncommon for that to be more than three percent per year. Such a high cost will likely make it very difficult for your money to grow and will not likely be indicated unless you ask.
A lot of investment funds, especially those sold by the banks, have an initial fee of up to five percent. In essence, this is a commission or “marketing fee” and should be avoided, or substantially reduced, where possible. Ideally, use an advisor who can offer zero-entry-fee funds.
An exit (or redemption) fee only normally exists so that a product provider can recuperate any commissions that have been paid if the investment is sold within a specified period. If you’re told that your fund has an exit fee, question it.
Annual Management Fees
All funds have management fees, but many will have annual management fees of up to, and in some cases exceeding, two percent per year. The investment return must exceed these fees before you can start to see any growth. It goes without saying that you should try to invest in funds that have as low a fee as possible.
Investment Management Fee
Of course, there is a cost to receiving investment advice; a typical ongoing investment management charge, depending on the account value, will vary from 0.75 and 1.25 percent.
Keeping it simple
Unfortunately, it’s very easy and all too common to end up with an investment that has many of these levels of fees. If you’re worried that that might be the case for your own investments, then you might wish to seek a second opinion to see if the investments can be appropriately restructured to reduce the costs. Investing should be kept as simple and transparent as possible. And one thing we learnt from the Global Financial Crisis is that complex and opaque investments often spell trouble. If you have a simple investment structure, with clean (low cost) funds and a sensible investment strategy, you’ll likely give yourself a better chance of success.
Always deal with an advisor who’ll discuss and make you aware of all the fees and costs involved. Importantly, make sure the firm is properly qualified and holds an SFC license.
Simon is regulated by both the HK Confederation of Insurance Brokers (011833) and the Securities and Futures Commission (BGY807). 6017 4140 | firstname.lastname@example.org
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This article first appeared in the April/May 2019 issue of Expat Living magazine. Subscribe now so you never miss an issue.