plonkee money an english-er's thoughts on personal finance

March 24, 2009

the importance of looking at fees

Filed under: investment — plonkee @ 8:26 am

I’m a maths graduate. This means that inevitably I know a lot of people who work in finance. I was talking to one the other day, and he said that one of the things they’re working on at the moment is looking at the projections that they use for investment returns in their marketing brochures. Currently they use a small range of numbers for annual growth and give a projection of what your investment might be worth in 10 years for the different growth figures.

They’re going to continue doing this in the future, but have decided to look at the range of actual returns on the products to pick the right range of numbers for growth. So, say currently they use 5%, 7%, and 9%, but actual growth is more between 2% and 6% over 10 years then they’d switch to using 2%, 4% and 5% in their marketing projections.

It all sounds very reasonable and sensible to me, but what was funny was that one of the new graduates is apparently doing a lot of the donkey work on the calculations suddenly realised that if (as is the case with many actively managed funds) the charges were 1.8% a year, and the projected return was only 2%, then the fund would have a 2%-1.8% = 0.2% actual return to investors. It would barely cover its expenses and certainly wouldn’t be a good long term investment.

Now, it’s unlikely that 2% is going to be a projected growth rate, but fees are really important when you’re looking at investments. They come directly off the growth of the fund, and you have to pay them regardless of whether your investment makes money or loses money.

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