A fat man and a thin man walk into a restaurant.
They sit down, take a look at the menu, and they both order the 200g Sirloin. Medium rare.
They sit down, take a look at the menu, and they both order the 200g Sirloin. Medium rare.
The chef receives the orders and goes about preparing the food.
For both steaks, he uses the same equipment and utensils, the same ingredients in the exact same amounts, and the steaks are cooked on the same stove top in the same pan.
For both steaks, he uses the same equipment and utensils, the same ingredients in the exact same amounts, and the steaks are cooked on the same stove top in the same pan.
Both steaks receive the exact same treatment from the exact same set of skills that the chef has acquired after years of studying and working, and the chef spends the exact same amount of time on each steak.
The result – identical steaks, perfectly cooked.
The result – identical steaks, perfectly cooked.
The steaks arrive, and both men finish them and then ask for the bill.
The waiter brings the bill, and the fat man notices that his bill is twice as much as the thin man’s bill. This despite them ordering the exact same thing.
The waiter brings the bill, and the fat man notices that his bill is twice as much as the thin man’s bill. This despite them ordering the exact same thing.
Naturally, the fat man asks the waiter, “Why is my bill so much more than the other guy's?”
The waiter replies, “Because you are fat”
The waiter replies, “Because you are fat”
Totally crazy right?
Well, this analogy (thanks @scottpape) is pretty much what you get when you use a financial adviser who charges a % based fee.
As your investment grows, you pay more and more for the same time, skill and resources, just coz your investment becomes "fat"
Well, this analogy (thanks @scottpape) is pretty much what you get when you use a financial adviser who charges a % based fee.
As your investment grows, you pay more and more for the same time, skill and resources, just coz your investment becomes "fat"
It's sometimes incredibly eye-opening to calculate the Rand based amount of a percentage based fee.
This is how much you will pay a financial adviser according to the size of your investment and the percentage based fee they charge.
This is how much you will pay a financial adviser according to the size of your investment and the percentage based fee they charge.
Now, when you are starting out, and your investment balance is small, a percent based fee is not a problem.
For example, someone with a R100k investment using an adviser who charges a 1% fee, pays around R80 a month.
That's cheaper than most bank accounts...
For example, someone with a R100k investment using an adviser who charges a 1% fee, pays around R80 a month.
That's cheaper than most bank accounts...
But if you have been investing for a while, and your portfolio has grown, that same 1% fee on a R3Million portfolio now costs you R2,500 a month!
You are now paying more than 30 times as much for the same time and service!
Why?
Because your investment is fat!
You are now paying more than 30 times as much for the same time and service!
Why?
Because your investment is fat!
So what's the alternative for large investments?
Fortunately, there are advisers who charge flat hourly or annual rates or a fee per consult.
For them, it doesn't matter how "fat" your investment balance is, they charge you the same rate.
It could be well worth the move!
Fortunately, there are advisers who charge flat hourly or annual rates or a fee per consult.
For them, it doesn't matter how "fat" your investment balance is, they charge you the same rate.
It could be well worth the move!
Remember that:
- Percent based returns can compound into something magical over time but
- Percent based fees can compound into pure evil and ridiculous amounts of money if left unchecked for too long.
- Percent based returns can compound into something magical over time but
- Percent based fees can compound into pure evil and ridiculous amounts of money if left unchecked for too long.
