By Hannah Goldsmith DipPFS, Goldsmith Financial Solutions.
Many entrepreneurs could retire earlier if they invested some time to review the fees being charged on their retirement and investment plans. I’ll explain why this is and give you practical examples to show the difference that can be achieved.
The Financial Services Industry charges fees on all investment products – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. There is nothing wrong with that – but most people, even business people, have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
Why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle? Even if you love your business if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
Regardless of age or how much money you have, high industry fees can delay you reaching your desired date to sell your business, or hand it on to the next generation; the day you start your retirement. With the changes implemented following the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on the 3rd January 2018, investors have never had so much information available to them. Investors now have the power to take back control of their money from the Financial Services Industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund manager’s. Yet very few investors understand the fees they are paying and the impact of those fees.
And that’s the problem; without knowing the total Financial Services Industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example:
Our first investor is aged 45 and has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on his money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was our first investor’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. You may be surprised to find out that the total Financial Services Industry charges have totalled £345,512 over this time.
It has therefore cost our first investor £345,512 to make £467,000 and he has lost eight years of his desired retirement lifestyle.
Our second investor is also aged 45 and has pension and ISA savings valued at £300,000. She wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. She decided to review the industry costs. Our second investor realised that she could get the same returns and same consumer protection for 1.1% per annum. She also achieved an average 6% return per annum on their money. Importantly she achieved a target fund value of £773,000 by age 65 – eight years before our first investor.
In other words, the target retirement fund value was achieved at the projected retirement date with one simple decision; shopping around to get the best fees.
As £300,000 was our second investor’s money anyway she has made a profit of £473,000 in 20 years not 28. It has cost only £102,000 (not £345,512) to make £473,000 and achieve their lifestyle objective. If at the time she decided to delay retirement to age 73 like our first investor, the fund value would continue to compound and be in the region of £1,128,500, increasing by an additional £360,000.
Are you more like our first or second investor? Are you being prudent and understanding the impact these Financial Services fees have on your money so you can keep more of your investment for yourself and your future retirement lifestyle?
As an entrepreneur you should take control of your hard-earned money, be in control of when you are able to retire, and have the money to enjoy it when you decide to let go of the reins.
ABOUT THE AUTHOR
Hannah Goldsmith is founder of Goldsmiths Financial Solutions and author of ‘Retire Faster’. Hannah specialises in Low Fee Investing and is challenging the way financial services are delivered to consumers in the UK, by enabling each client to understand the nature of investment costs and the impact these costs have on their future lifestyle.
Goldsmiths complimentary ‘Second Opinion Service’ reviews investors’ existing portfolios and makes recommendations on Risk, Diversification, Performance, Cost and Tax efficiency, making investors’ money grow in a more transparent and financially efficient way.