The fees we pay for services, investments, loans, and products need to be understood prior to entering any agreements or purchases. Often people overlook this because they are more concerned with accessing the service or under pressure to make the purchase or simply not bothered to understand the terms and conditions.
I am guilty of this too. I remember when I purchased my first car (more than 2 decades ago), I was thrilled at the idea of being able to buy my first car. I went to the dealership on my own and mentioned I was in the market to buy a car. They asked me for my salary slip and then told me how much I could afford to spend on a car. Back then, credit regulations were not as stringent as they are now, and financial education was a privilege. I did not bother to make sense of how much interest I was being charged or what fees I was liable to pay. All I was concerned about as a twenty-something was my independence and mobility. I did not understand that the fees and ridiculously high-interest rate I was charged meant that I was getting less than what my money was worth. Lesson learned. Costly lesson learned.
I realise now that the power of negotiation could have resulted in spending less money or getting a more valuable car.
Paying fees is obviously a necessity for the growth of our economy. But consumers need to remember that they have the power of choice. With the array of services and products available, consumers have the choice to shop around, negotiate and delay their purchases when it is convenient for them.
So, before you rush into an agreement, make sure you have understood the terms and conditions and fees you will be paying. When it comes to investing, remember you may be charged fees for advice given by your financial advisor or planner and administration and performance management fees. As an example, if the return you earn is 10% per annum, and the fees you pay are 2% per annum, your net return is 8%. Applicable taxes and inflation costs still need to be considered.
Your net return becomes an extremely important consideration when you have limited resources to invest and limited time to achieve your goal. For example, if your goal requires you to achieve a net return of say 9% per annum and the term to realise your goal is 5 years, and you only earn a return of 8% per annum, then you will not meet your goal. This is the “risk” of not meeting your goal.
In a nutshell, prior to entering any agreement, make sure you understand, analyse and negotiate a reduction in fees.