Steven Andrew Soderbergh (January 14, 1963 – ), American film producer
In our article entitled "Should I save or should I invest?", we saw that people invest to achieve a certain return.
When opting for one or the other investment, many investors focus on the interest rate level, the growth prospects of the companies whose shares they are interested in, the past performance of investment funds or on potential capital gains. Often, they overlook, or at least underestimate, an element that has a huge impact on the success of their investment: investment costs.
Costs are lurking everywhere. Some are transparent and clearly displayed, others are disguised or hidden, some are unique, others recurrent, some are fixed, others are variable …
Whatever the form of these costs, they all have one thing in common: the unpleasant tendency to erode the performance of your investment over time. After all, the return you get from your investment is nothing other than “performance minus costs”.
Managing the savings account or the securities account of a customer, developing a financial product, trading shares at a Stock Exchange on behalf of a client, managing an investment fund, providing investment advice … are all financial services, and those offering these services want to be paid to do it.
But it is very rare that service providers send their customers detailed invoices for their services. Instead, they charge their clients fees and commissions. The problem is that companies are often discreet, not to say silent, about the final cost of their products and services.
The success of an investment starts with keeping investment related costs as low as possible. To do this, be aware that your investment costs can be extremely varied. So ask as many questions as you can to clearly find out which costs apply to your specific investment – and ask these questions before investing. This will allow you to look for alternatives that offer the same performance at lower cost.
The first type of costs that you need to identify are those that arise at the moment in time when you make your investment.
If you invest on the stock market by buying shares or bonds, for example, you have to pay transaction and brokerage fees. If you invest in an investment fund, you usually pay a subscription fee, a kind of sales commission, that varies depending on the type of fund you have chosen. Direct investments in real estate are associated generally with quite considerable registration fees and notary fees. And if you conclude a life insurance contract, it is very likely that the first premiums you will pay will be used to pay the insurance agent who sold you the contract.
However, the price you pay for the asset you invest in – whether stocks, bonds, art, antiques, fine wines, classic cars or real estate – and the associated transaction costs are far from being the end of the story.
Depending on the asset in which you have invested, you will have to bear the cost of maintenance, storage or insurance. Your bank will charge you recurring commissions to keep your securities in custody in a deposit account. Even a simple savings account at your bank will generate account administration fees. An investment fund may charge you a management fee or other fees to cover the costs for safekeeping the securities held by the funds at a custodian bank. In addition, any transaction made by the fund itself will generate brokerage commissions.
Know also that the longer the maturity of your investment, the greater the impact of recurring fees and commissions will be.
Costs may also apply if you disinvest or, in other words, if you want to get back the money you invested. If you sell assets in which you have invested, be aware that fees and commissions may apply as well. If you sell shares, you will have to bear transaction and brokerage fees in the same way as when you were buying these securities. An investment fund may charge you a redemption fee if you leave the fund.
And finally, whatever your investment looks like, taxes and charges can have a significant negative effect on your returns.
These examples are far from covering all costs that may apply when you invest.
Be aware that when investing, you can try to reduce costs, but you can’t avoid them entirely. Solid financial products have a price, and good investment advice also deserves adequate remuneration.
Don’t opt for a specific investment simply because it is cheap, but be careful not to pay too much either. Carefully analyze all potential fees, commissions, taxes and fees and keep in mind that a lack of transparency of a financial product is often a sign of high costs.
A final word: If you are discouraged by potential costs, remember that not investing will cost you money as well. By simply keeping your money under your mattress, its value will decrease over time due to the effect of inflation.