A managed investment portfolio is one of the highest quality and most profitable investment options, as long as it is in good hands. In recent years we have witnessed a growing increase of new investors who understand the profit potential inherent in investing in the capital market and choose to put their money in a variety of products and investment routes.
However, high net worth owners often prefer to manage their investments through a professional and skilled investment manager, one who will help them increase their capital optimally over time. Our company employs expert investment managers who manage client portfolios and help them earn more money from their money. Managing an investment portfolio has many advantages, but it also involves commissions and management fees that can affect future savings and profit potential.
Whether you are considering investing your money in an investment portfolio managed by a professional investment manager or whether you already own an investment portfolio, you should know how the management fees you will pay may affect your investment in the long term, and how optimal management of your investment portfolio can allow you to earn more.
What is a managed investment portfolio?
A managed account is a portfolio owned by one investor but overseen by a professional investment manager hired by that investor.
Investment managers can require minimum investments of varying amounts and are usually compensated by paying a fee calculated as a specified percentage of assets under management (AUM).
A mutual fund is a type of managed account, but it is open to anyone who has the means to buy its shares, and is not customized for a particular investor.
Here are some important principles you should know about investments:
Every investment involves costs.
Money you lose due to costs increases exponentially over time.
Portfolio Management Fees: Because investments with higher management fees have to overcome these expenses, their performance tends to be less rewarding than lower cost investments. However, quality and professional management has better chances of generating a larger profit than the “loss” on the management fee.
It is important to understand what you are paying for – every investment has a price, even if you don’t realize that you are the ones paying it.
Why is the amount of management fees so important when it comes to savings and investment products?
The management fees charged for the investment may not seem like a big deal, but they add up along with your investment returns. In other words, you not only lose the tiny amount of management fees you pay – you also lose all the potential growth that money could have made over the years to come.
What does it look like in numbers?
Imagine you invested 100,000 NIS. If the investment portfolio earned 6% per year for the next 25 years, without paying management fees, you would end up with about NIS 430,000.
If, on the other hand, you were to pay 2% annual management fees, after 25 years you would only have about NIS 260,000.
Yes, that’s right: the 2% you paid every year will wipe out almost 40% of your final savings value. Suddenly these two percentages do not sound like such a marginal amount.
How do the management fees affect your savings over time?
Do you know how much money you pay for management fees in your investment portfolio? If you have no idea, don’t worry, you are not alone. Management fees are often seen as a marginal and minimal amount that does not significantly affect the investment portfolio, but in fact it is an important component with a large impact on the amount you will receive at the end of the savings and investment period. That’s why it’s important to take into account the management fees you pay in your savings and investment strategy, because every shekel you pay reduces the amount of your savings, and as a result, reduces the net return on your investments.
what can be done?
There are many things investors cannot control. We have no control over the markets and we cannot control the decisions of the insurance companies and investment houses. However, there is one critical part of investing that we can control: reducing the management fees we pay to the minimum possible.
Compared to the impact of the choice of investment routes and the returns received on it, the reduction of management fees may feel like a consolation prize. But management fees that seem insignificant can, as mentioned, significantly reduce the capital you will accumulate on your investment in the long term. Moreover, studies have shown that investments that charge higher commissions and management fees yield lower performance than investments that charge lower commissions and management fees.
However, it is important to remember that the amount of management fees is not the most important factor in managing your investments. Choosing a recommended investment portfolio, the right management bodies, investment routes and your investment portfolio manager is extremely important for the return you will make and the capital you will accumulate over time.
The effect of the two main types of fees
There are a number of different commissions in the investment industry. Here we will focus on two broad categories: commissions for buying and selling securities and management fees for the investment manager.
Securities buying and selling commissions
Mutual fund expense ratios are fees charged as a percentage of assets under management (AUM). For example, an expense ratio of 0.50% tells us that the mutual fund will deduct half of 1% of the amount an investor holds in the fund. These fees are not one-time: the fund collects this fee every year.
Expense ratios aren’t the only fees mutual funds charge. Fund managers pass on to investors the cost of buying and selling securities owned by the fund. The more a fund trades, the higher the costs, and these fees are charged in addition to an expense ratio.
Management fees for the investment manager
Management fees are the costs charged for the investment manager’s work. Similar to the mutual fund expense ratio, many investment managers charge a percentage of the assets under management. Investment managers sometimes direct investors’ money to mutual funds, among other investments.
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