The launch of passive fund manager Vanguards new low-cost fund account has rocked the established UK fund management industry.
Vanguards new account will cost investors just 0.15% per annum in addition to underlying undergoing fund charges, and account fees will be waived above the first 250,000 invested. This structure means that the maximum account fee payable is just 370 per year, a figure which is significantly lower than the vast majority of other UK fund managers.
For example, Hargreaves Lansdown charges 0.45% as a basic platform fee and other wealth managers can charge as much as 1.5% per annum, excluding any fund management fees. Vanguards lowest cost tracker fund charges 0.08% per annum on top of the 0.15% annual fee giving a total cost of 0.23%. Investing in the same fund with Hargreaves would cost 0.53% per annum.
Charges add up
These costs may not seem like much at first glance but over the long term the extra few hundred basis points in fees every year can really add up.
Lets say you started off with an investment of 1,000 and added 100 every month to your investment pot for five decades. At an annual return of 6% per annum and paying an annual charge of 0.23%, your fund would be worth 349,386 at the end of the observed period. Money lost due to fees would be worth 28,661 over the period. Assuming the same initial and monthly investment as well as 6% annual return with a higher 0.53% annual charge, your pension pot at the end of the period would be worth 315,521 with 62,526 lost to fees and charges.
In the worst-case scenario, where you pay 1.5% per annum in fees, the total lost investment, assuming all the same variables above would be 149,616. The final investment pot would be worth 228,431, a difference of 120,955.
According to various surveys, the average income required by over-50s in retirement to cover the essentials is around 20,000 per annum. On this basis, by making the mistake of paying 1.5% per annum to your wealth manager, youre essentially spending enough money to fund six years of retirement.
Longer to reach a million
Another way of looking at it is that at a charge of 0.23% per annum, with an initial investment of 1,000 and a monthly contribution of 100, it would take 46 years with an annual investment return of 10% to build a pension pot worth 1m. With an annual fee of 1.5%, it would take 51 years to reach the same level. A 51-year timeframe at an annual charge of 0.23% would give you a pension pot of 1.6m.
These figures speak a thousandwords. Vanguards new low-cost fund management platform does make achieving the 1m benchmark more realistic for almost everyone.
While it may be tempting to put all of your cash into a low-cost tracker fund, its worth considering the diversification and higher returns offered by investing in some single stocks as well.
Companies such as Royal Dutch Shell, which offers a dividend yield thats double the market average, and Boohoo.com, which has outperformed the FTSE 100 by 250% over the past 12months, complement the stability and predictability offered by a tracker.
Nonetheless, even if you do decide to buy these stocks, its vital you keep fees to a minimum to reach your maximum wealth creation potential.
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