One of the most important discussions in today’s investing is cost and most importantly the TER or Total Expense Ratio for a portfolio.
TER= Total costs / / Total assets
The TER is comprised of all costs your portfolio will incur, directly or indirectly, and your asset manager is responsible to explain the potential impact these will have over the course of your investment. A TER would normally include:
- Asset Management Fees
- Success Fees
- Execution Fees
- Settlement Fees
- Custody Fees
- Entry Fees
- Exit Fees
- Minimum Account Holding fees
- Statements Fees
- Other hidden fees
A healthy TER is anything below 2% which lets your portfolio ‘breathe’. We know S&P500 is averaging 6% Total Returns per year for the last years. So if your asset manager/bank is charging you in total 3-4% per year, it means your portfolio is left with just 2-3% only, so no wonder why you end up with small profits after 10 years.
At XSpot we believe that a low TER will help a portfolio grow over the years better than a higher TER where the managers might still do a great job, but still the effect of high fees can ‘eat’ much from your income/growth. That’s why we don’t complicate fees & we charge what we believe is fair to offer world class services and let your portfolio grow over the years. Below you can see an example of the impact of total expenses in a portfolio of 100,000 EUR with 4 different providers after 10 years.
Assuming a EUR 100,000 portfolio invested with 4 providers, and that all managers applied only 1 rebalancing per year and there was no effective change in capital over the period of 10 years. If all providers invested in the same Growth Portfolio targeting a gross 6.50% per year, after a 10-year period with XSpot you’d make extra 33% against Traditional Manager A or 76% more than Bank B. That is a whopping EUR33,000 extra savings against Traditional Manager A or EUR74,000 against Bank B without calculating any compounding on your returns.
So now you understand why costs are so important. Those EUR 1,000 extra per month can go towards your mortgage repayment, kids college fund or even topping up your investments!
So make sure you ask your asset manager of the total costs for your investments not only in % terms but also in EUR terms and always compare to make an informed decision by projecting them 5 or 10 years forward.