Costs can kill your retirement - do you understand the fees you pay on your investments?

At 10X it's our mission to educate investors about fees, because the fees you pay are under your control and they can have a substantial impact on your retirement.

Fees form part of the "Golden Equation", which you must balance to ensure you never run out of money. Simply, the gold equation states that fees + drawdowns + inflation must be less than or equal to the return on your investments. If you get this equation right, you will never run out of money.

We asked Asavela Gwele, an Investment Consultant at 10X to outline and unpack some of the common types of fees that financial providers charge. This list does not cover all fees that may be charged, but it is a good place to start when interrogating costs on investment policies and products.

Effective Annual Cost (EAC)

Before we get more granular, you need to understand the big ticket item: your Effective Annual Cost, which summarises all of the annual fees you pay into one line item. This tells you, in total, what you are paying to your investment manager. Usually, EAC is represented as a percentage of an investment.

“In at least one extreme case (I won’t name names) I’ve seen that this can go as high as 48.7%, which is very near half of the investment,” Asavela says, “Giving away half your investment capital, whether the market is doing well or not, is going to be very painful.”

To understand the impact of fees over the long term consider the graph below. If you don't know what your EAC is, you could be losing out, badly. Fix this problem and educate yourself now by using our EAC calculator.

Performance fee

These are exactly what they say they are. If a manager performs well or returns are positive compared to the chosen benchmark, a performance fee applies.

“At 10X, we believe that good performance should be rewarded but we don’t believe that reward should come at the expense of the investor, or when positive performance is minimal. 10X is all about performance without any of the fuss and we do not charge performance fees.”

Even though we don't charge performance fees, we still expect to outperform the vast majority of our peers. You can see the performance of our flagship Your Future Fund here, and we encourage you to do a free cost comparison with us to figure out whether our combination of fees and performance could be getting you more money in your retirement.

Management fee

This is the basic fee managers charge to run their funds. While management fees are levied to keep the lights on, they can vary dramatically and high management fees can mean investments perform poorly even when the markets shoot the lights out.

“This one may be confused with the performance fees mentioned above, but it is levied irrespective of how the investment performed,” says Asavela.

Transaction costs

When a manager buys or sells assets, fees will be incurred on the transactions, and these costs can be passed on to clients.

Asavela says: “With every transaction, the financial provider must pay different agents in the markets, from bank charges to clearing and settlement fees and brokerage fees. Even when these costs are paid by the fund rather than being passed on to the investor, they still lower total investment returns.”

Transfer fees

When an investor moves their portfolio to another financial provider or company, the outgoing company can sometimes levy a portfolio transfer fee.

“This might sound harmless enough, but it will feel like a punishment when you discover that you are being charged a penalty to move your investment to a different company,” Asavela says, adding, “At 10X we don't charge clients a transfer fee.”

Exit fee

The exit or withdrawal fee is levied on an investor cashing in their investment partially or entirely. This is another fee that can feel like extortion but, unfortunately, is common practice in the investment industry.

“Much like divorcing, splitting up, de-coupling or parting company, this fee may have different names but ultimately means the same thing,” Asavela says. “The common factor is that it comes at the end of a relationship [with a financial services provider].”

Paying low fees makes a big difference in a world where everything is becoming more expensive. A 1% difference in fees could mean up to 30% more money in retirement. If you think your investments could be doing better for you, why not leverage the 10X Consultant team's decades of experience in the industry, and get in touch. Alternatively, visit the 10X website.