Economics

Avoid unnecessarily high costs for financial products

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Consultants and brokers are usually reluctant to talk about the costs of financial products; they prefer to refer to the small print in the so-called product information sheets . Or they play it down by claiming that good products have their price.

Do not be fobbed off with it, because the costs are of paramount importance for your investment success.

How can you tell what your investment is costing? The following overview shows the most important products and some types of costs (the list does not claim to be complete, we have only shown the most important):

PENSION / LIFE INSURANCE

  • One-time costs : acquisition and distribution costs
  • Annual costs: administrative costs
  • Where to look Annual status announcement, product information sheet, in an emergency: ask in writing

INVESTMENT FUNDS

  • One-time costs : front-end load, e.g. T. also redemption fee
  • Annual costs: TER (Total Expense Ratio), performance-related remuneration
  • Where to look Key investor information

ASSET MANAGEMENT

  • One-time costs : Usually none
  • Annual costs:  asset management fee, in addition to or offset against running costs of the investment fund
  • Where to look Asset management contract

BUILDING LOAN AGREEMENT

  • One-time costs : acquisition fee
  • Annual costs:  partly account management fee
  • Where to look Bauspar terms of the respective Bauspar tariff

Why is the cost so important? On the one hand, they definitely accrue, but possibly promised income not.

This illustrates an extreme example :

Suppose you invest 100 dollars per month in a unit-linked pension insurance . Before the money is invested, the insurance company deducts 7 dollars in administration costs and an additional 4 dollars in acquisition costs . Of the 100 dollars, only 89 dollars are invested on average. In fact, there is much less left at the beginning of the contract because the insurance companies do not distribute the acquisition costs evenly over the entire term, but deduct them in bulk over the first 5 years.

In order not to make it too complicated, let’s assume 89 dollars that are invested. In an investment fund , more precisely in a fund of funds. This does not cost anything extra, but an annual administrative fee of one percentage point of the managed money is due. So that the 89 dollars are still there after one year, a return of one percent must first be achieved to offset the management costs for the fund of funds.

But it wasn’t that yet. The fund of funds is called a fund of funds because it invests the money in other investment funds. So another 1 or 2 percentage points are due annually. So that the 89 dollars do not melt away like snow in the sun, the fund managers have to generate income of 2 to 3 percent annually before all the costs. Will that work? Unlikely, based on what scientists have found in their studies of mutual funds.

Hello, I have been working as an investment consultant and author for more than 20 years. I love what I do and I have enriched everyone around me. A lot of money is not important, the main thing is how you use the money.

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