Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 

Let’s talk about fees. They’re not the most sexy thing in the worldwide world, but they do make a huge difference to our potential success as investors. Why do they make such a difference is primarily due to the power of compounding and how they negatively impact on our portfolio’s ability to compound with time. What are fees? Well, fees are how the platforms make their money, the platforms through which we purchase assets. What platforms do I mean? Well, if you think about it, if you have an ISA or a SIP or a general investment account, think about the brand name on which that account is hosted. Think about the app on which that account is on. That is your broker. That is your investment account. That is the company through which you invest. Now, the fees are how those companies make their money, and remember, they’re always going to make money somehow. It’s just that sometimes they’re a little bit more behind the door, but it than others. How many of us have been drawn in by platforms that claim to have no fees? They do have fees, it’s just that they are less obvious and we don’t know how they work. Those platforms often have higher inverted commas fees than the platforms that do outwardly acknowledge that it costs money to invest with them. They outwardly acknowledge that they do have fees. The platforms that pretend they don’t are sometimes actually the most expensive ones. Why is that? Let’s get into it. Fundamentally, there’s three ways that platforms can make money. There’s only three ways that any investing platform can ever make money. There’s only three ways that any brokering account can ever make money, and they are as follows. They’re either ongoing fees, recurring fees, they are one-off fees Usually they’re dealing fees or they’re via something called the spread. These are the things that you got to watch out for. These are the things that you have to equip yourself with this knowledge to be able to understand this, so that you don’t get caught out by those fees that we talked about just a minute ago. So we can understand how they work and also mitigate them. Let’s talk about ongoing fees First of all. So what are ongoing fees? Well, for every single fund that we purchase, or sometimes on the platforms that we use, whenever we purchase an asset on there, they’ll charge us a percentage every single year. That is the management fee. Oftentimes it is known as, and it can come in two forms. It can either be the management fee off the fund we are purchasing, or it can be the management fee off the platform. Now, there’s lots of different names for these management fees in VertiCommerce and you’ll be able to see each and every platform has their own individual name for those ongoing fees that we talked about just a second ago. The point is they all fit under the category of ongoing fees. Now these can have a huge impact on your investment success. In a recent podcast, we covered how a 1% difference over a 40 year time frame, a 1% increase in the returns in your investment per annum over a 40 year time frame, can actually increase the size of your eventual pot by 50%. That is a massive amount, particularly whenever lots of us are going to be invested between the ages of 25 and 65, because that is the typical amount of time that we will spend working. That is the typical career length for most of us. If 1% extra per annum allows us to be able To have a 50% increase in our eventual return, well, that’s obviously a massive difference and we’ve got to be wary of that. We’ve got to be conscious of that. Therefore, if we’re spending 1% every single year on an ongoing fee because of the platform we’re using or because of the Fund that we have purchased that specific fund. Well, that’s just going to make a huge difference, isn’t it? So we need to be conscious of that. Another instance in which we can see ongoing fees in Investing is whenever we invest via professional. Sometimes, these professionals will charge us ongoing fees. In fact, most often times they do. Usually, a financial advisor will charge you a fee of between 0.5 to 2%, sometimes even as high as 3, but very rarely, usually 0.5 to 2%. Now, as I say, that may not seem like a lot from the outside looking in. However, if our stocks portfolio the American stock market returns 10% every single year, then if our stock portfolio is getting a return of 10%, then after a 2% fee, we’re gonna have a percent that’s actually one fifth of a profit, which is a huge amount of money. Now, if you run a business and you have to give away one fifth of your profit every single year, that’s a ton of cash, that is a lot of money, and we got to be conscious of that. So, whenever it comes to our investing, that’s what 2% looks like for most of us, because most of us will agree to the fee but not really understand what returns we can expect. So, really, these ongoing fees that can manifest in two ways. They can either be platform specific or they can be related to the professional that we use. Now the key thing to understand is that there may be an ongoing fee. Well, there probably will be an ongoing fee to greater or lesser degree, but it’s our job to mitigate it as much as possible. So we can do that by two ways. We can do that by selecting a platform which is reputable and has minimal fees, and then also, within that, selecting funds which will achieve the objective that we have crystallized, that we’ve identified for ourselves, and do it in a way which is as fee efficient as possible, ie, be as low as it possibly can, while still giving us exposure to whatever it is that we need exposure to. The other way of doing it is that whenever you understand how you can grow your own wealth and do it in DIY way, do it yourself then, of course, professional fees will be minimized. It’s not just as clear-cut as that. Obviously, there are certain instances in which we do need professionals. However, it’s important to remember that the DIY approach is out there and it can be obtained and it can be utilized by most people Whenever they have the correct information, whenever they have access to the correct information, which is the whole entire point of Tennessee invest, and which is why we’re here talking about this right here, right now, because if you’re listening to this podcast, there’s a good chance that you’re interested in this stuff, which is wonderful. So use the community as it’s intended to be, to allow you to minimize fees. Allow you to minimize fees and Therefore reduce their impact in your portfolio and ultimately pull forward the date that you will be financially free. Cool, long story short. On-going fees exist. There’s really two varieties of them. They’re either specific to the platform and funds, ie your investments, or they’re related to the advisor that you use. So the whole point is to minimize these as much as possible, and the solutions that I’ve given you will help. The key, the principle that we must take on board just then, is that, actually, whenever we empower ourselves to be able to undertake investing For ourselves the DIY way, do it for you know, do you know, do it for your own portfolio, do it as an individual that the fees tend to go down as well, but, of course, then we have to take on the responsibility of managing our own portfolio. Next type of fee that we’re going to talk about. The second type of fee is dealing fees. What are dealing fees? Whenever we purchase an asset on a platform, then sometimes we will be charged for the transaction as a one-off cost per transaction. Now I’ve seen two types of dealing fees. I’ve seen percentage dealing fees, as in if you spend 100 pounds to purchase a funder, a stock or whatever, that they’ll charge your percentage off that 100 pounds every single time you purchase something. So if we came back the next time we spent 200 pounds, it would be the same percentage again, except it would be of 200 pounds. I’ve also seen flat ones as well, flat ones being maybe a few quid per purchase. Now there’s two real ways that we can minimize the impact of these fees on our portfolio. The first way that we can minimize the impact of these fees upon our portfolio is to basically only purchase assets once a month, maybe dollar cost average or weigh in. Any longer than that, we run the risk of sitting on the sidelines of the market too long. So that’s why dollar cost averaging is a good strategy. It’s a toss up, it’s a balance between purchasing them too frequently, so that it’s a lot of legwork and we’re overexposing ourselves to these fees, but it’s also to counterbalance that on the other side. We don’t wanna do it too infrequently as well, because that would mean that we’re sitting on the sidelines of the markets where they’re cashed for way too long. So you gotta balance the side, and you know what month a month is a good rule of thumb on that, one that I’ve seen most people use. That is one way that you can mitigate the impact of a dealing fees on your portfolio. The other way is to pick a good, reputable platform that doesn’t have very high dealing fees. Therefore, we will mean that, therefore, what that will mean for your portfolio is that actually, the impact of dealing fees isn’t that much and it isn’t something that you have to worry about to high level. It isn’t something that you have to worry about very frequently, given that you’re minimizing how many transactions that you’re undertaking, that you’re performing, and also you’ve selected the correct platform which doesn’t have very high dealing fees. The third type of fee that I often see on platforms is called the spread. What is the spread? Well, think about it like this If we go to an auction house and let’s say somebody is selling an item and they’re selling that item for 100 pounds. Now, just because somebody is selling something up for 100 pounds doesn’t mean that somebody is willing to bid 100 pounds for that item and the highest bid might be 90, might be. If the seller is 100 pounds, then the highest bid might be 95 pounds. Now, the difference between the highest bid and the lowest sell in that instance is five points, and that number is known as the spread, that is, the spread between the lowest ask and the highest bid. Now, when we are reframing what I’ve just said towards the world of assets and towards the world of investments, when we’re orientating what I’ve just said towards the world of assets and investments, then if somebody has a stock, for example, and they wanna sell a stock for 100 pounds, but the highest bidder is only willing to bid 95 pounds, then the difference between those two numbers is the spread. Now, when you look at platforms, you can often see that there’s a difference between what someone is willing to sell for and what someone is willing to buy for. Like I say, those are the spread. So how do platforms make money from the spread? Well, the first thing to understand is the bigger that they can artificially make their spread is the more money that they make, obviously, if the spread gets way too big, then the prices are not based on the market, they’re not based on reality and therefore customers will just move to other platforms. How do they make money from the spread, these platforms? Well, think about it If on platform X the lowest sell price off a stock is 100 pounds, yet on platform Y the lowest sell price of another stock is 98 pounds, then what it means is platform X can go to platform Y, purchase the stocks for 98 pounds, take them to their own platform and sell them for 100 pounds. So effectively, it’s arbitrage. So the bigger platform X makes its spread, the more money it makes. However, it obviously has to be counterbalanced to a degree by reality, by what the market is saying, because otherwise it was way too big and then people just won’t use the platform. However, that is how they make their money. That’s when you see these platforms out there that say, hey, we’ve got no fees. Actually they’re just making their money in more subtle ways. They’re giving you misrepresentative prices and that is how they’re able to generate a profit from those. And it works both ways. It works on the sell side and it also works on the buy side. They’re taking the assets, selling them on other platforms for a profit. The bigger they make, their spread is the more money that they make, so you gotta watch out for that. So, really, in reality, as soon as I see a platform that says no fees, I’m like, hmm, okay, now I’m a little suspicious, because now I know that you’re being a little bit under the table and I don’t think I’m getting the best deal. Therefore, the bigger the spread, the more money they make. Those are the only three ways that any platform can ever make its fee Can never make any money. Those are the only three ways that a platform can ever bill you. Those are the only three types of fees that there can ever be. Therefore, when you understand how they work, you also understand how you can get the best deal, and there’s a whole point of this podcast. So, remember, the whole idea is to keep fees as low as possible, use reputable platforms and also purchase assets which are aligned with our long-term objectives, whatever those might be.