Understanding the impact of fees and charges on your investment strategy

Maintaining a robust investment strategy that will reap a positive financial outcome throughout your life is a complex process that involves a carefully managed combination of the avoidance of unnecessary risk, maximizing of returns and understanding the impact of fees and charges on the long-term value.

For many people, a primary driver to invest in any range of asset class is done on the basis of long-term financial needs. In fact, the nature of investing should always be long term by nature as short-term goals will be near impossible to achieve without the presence of significant risks that can result in either a lot of money being made in a short period of time or significant loss of capital.

In recent years, there has been a substantial increase in the debate about the need for more people to take a more active role in their long-term financial well-being and as a result, more investment options are being introduced into the market that offer varying promises of investment returns. But returns are only one part of the overall equation for any would-be investor to consider their options.

A less discussed feature of many investment vehicles today are the actual charges that come with them, and these are not insignificant. In fact, in recent years, it has not been uncommon for some investments to generate relatively little in the way of overall return once investment charges are factored in. This is not to say that those who manage investments are doing anything wrong, this is as a result of both a combination of how difficult the overall international investment climate has become as well as the actual cost of managing a fund.

That said, it is important that consumers are aware of charges, how they work, how they are applied and what their eventual impact will be on their money.

So what are the typical fees and charges that apply?

If you have an existing investment fund, you will be paying annual management fees of one kind or another. These fees are paid to account managers whose role is to ensure that your investment fund is monitored and placed in the correct ‘risk categories’ to met your long term goals. For example, many fund managers will generally invest money in small and large companies as well as many other asset classes to ensure that the long-term financial goals of clients are met. It requires a lot of market knowledge, of trends developing as well as other factors such as local political risks, competitor risks and so on.

In some older investment plans, it may not be unusual to pay as much as 3.5% of the annual fund value in yearly charges, which could end up being more than the value of the return in any given year. In the last number of years, the difficult international investment climate and especially, the increasingly difficult Irish investment climate has made investing incredibly challenging. So it is little wonder why some investors question their strategy when they receive a copy of the overall investment value.

Newer investment fund managers typically charge less than half , but you need to watch out for how well or poorly a fund manager has performed in the last number of years before you make a decision to move your account if you feel you are being overcharged. However, great investment managers are well worth their money. They track the markets, they understand trends and they know where to avoid risks…and take appropriate risks where they are likely to yield a positive return.

Exit tax – while an exit tax is not a management fee per say, it is the elephant in the room as far as the long term value of any investment strategy is concerned. This extraordinary level of tax is plied on the growth value of the investment. It must be factored into the math when evaluating long term value.

Long-term investment strategies are becoming more and more difficult for many. Difficult economic times, reduced incomes, rising costs including rising mortgage costs are making it difficult for a growing number of people to actually find the necessary funds to invest. However, for those that are presently or may be considering future investments, understanding the primary costs associated with investing will assist them make more informed decisions and plan accordingly.

Finally, for those not fully familiar with investing, it is an incredibly complex field that often changes rapidly. Many times, investments that hit the newspaper headlines may actually be in the decline. If you are serious about investing for the long term, it is important that you take a healthy interest in the world and what the main drivers are. Also, if you are preparing to part with some of your hard earned money, consider the merit of paying for some professional financial advice. Remember, an advisor that does not charge you a fee may be looking to sell you something so it their advice really independent? It is important also that you understand what annual / management fees you are going to have to pay and consider the long-term track record of the fund / fund manager as you prepare to make that important investment decision. Be informed and pay for professional advice.

Add on:

If you have an investment fund which has been in place for many years, it may well be worth your while to hire an independent financial advisor to review it. In recent years, greater competition among funds and fund managers has resulted in a sharp fall in fees which has resulted in a significant long term boost in investment performance.

In an era where taking greater responsibility of your long-term financial well being is growing, it is also important that you become aware of the general risks that will affect your financial well-being in the future. A robust investment strategy should see you through but you need to take an active role in how international events and trends will affect your money and your investments. Even if your investments are with the best fund managers, don’t leave it sit.

Pay attention and ask questions. Ultimately, the only person that really will care about your financial well being is you!

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