Fee fixation could hurt retirees, says report

Overdependence on simple low-fee strategies could expose investors to unanticipated costs

Fee fixation could hurt retirees, says report
The case for low-fee investing has clearly been compelling for investors, who last year pumped $18.9 billion dollars into Canada-listed ETFs. But those who think investing in low-cost products is enough to fund their retirement may want to think again, according to US-based online investment advisory firm United Income.

“The benefits of lower investment prices may be curbed by other non-fee costs created from features that are oversimplified or imprecise in investment products and wealth-management services,” the firm said in a recent report.

To determine the potential impact of non-fee costs, the firm tested 62 different retirement products through thousands of combinations of possible future market returns. While 75% of the retirement products had low relative prices, around 96% also failed to minimize non-fee costs — which can include higher taxes, dampened investment returns, and reduced money from public benefits.

According to the report, non-fee costs stem from oversimplifications and imprecisions, which they divided into four main categories:
  • Investor risk preferences – when factors like existing investments, changes in income or spending needs, and low-risk income do not influence investment allocations;
  • Investor profile – includes not personalizing estimates of longevity, failing to benchmark spending needs against peer spending behaviours, and neglecting to account for health changes in investment allocations;
  • Public policy – omitting factors such as tax considerations in account withdrawals, tax implications of investment locations, strategies to claim public benefits, and retirement date strategies; and
  • Planning – failing to simulate positive and negative market outcomes, potential changes to spending outcomes, and broad ranges of retirement dates and benefits-claiming strategies
The firm found that for a typical retiree, reducing non-fee costs resulted in seven times more wealth in retirement compared to the effect of a 100-basis-point reduction in investment-management fees. Typical retirees using strategies with lower non-fee costs were determined to accumulate an average of 124% more wealth in retirement than those relying only on products with a low relative price.

In addition, retirement strategies that had lower non-fee costs were 42% more likely than those with just a low relative price to generate enough money for typical retirees.

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