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El Cerebro

Investment

Cost of fees

What a difference in annual cost amounts to, measured in euros rather than in adjectives, on the same investment and with the same assumptions.

What it does

It projects two identical plans —same capital, same monthly contribution, same number of years and same gross return— and calculates the final value of each one, deducting its own annual cost before compounding. The difference between the two final values is the figure that comes out. The detail shows the two amounts separately, so you can see them side by side.

Key concepts

  • Gross return: the return before costs. It is the one shown in a brochure or a statement, and it is not the one that ends up in your pocket.
  • Net return: the gross return minus the annual cost. The account subtracts the cost before compounding, because a 0,2 % that gets paid never goes on to generate any return.
  • Annual cost: the percentage applied to the assets every year. It may be a management fee, a dealing cost or some other charge of a similar nature, and the calculator treats it as nothing more than a number.
  • Cost already included: if the return you enter is already net of costs, subtracting another one for the same reason counts the same thing twice. That is why the return field is described as gross: the calculator cannot know where that number comes from.
  • Cumulative difference: the cost is not paid once, it is compounded. A 0,2 % annual cost on a growing balance weighs more every year, and that is why the final difference is not the annual cost multiplied by the number of years.

Frequently asked questions

Why is the difference larger the longer they are kept?

Because the cost is deducted before compounding. Whatever the cost takes away that year, the balance no longer has that year, and the following year starts from a smaller base. The effect accumulates over time, so a small difference in cost turns into a large difference in capital.

What happens if the two costs are equal?

The figure comes out exactly zero and the two curves on the chart overlap. That is the proof that the calculator measures the difference in costs and nothing else.

What happens if option A is the more expensive one?

The figure comes out negative, because the final value with cost B is higher. The calculator never changes the sign: a negative amount there means the cost difference has worked against option A.

How is the cost applied in the account?

The annual cost is subtracted from the annual return, and the rate that comes out of that is the one compounded every month. With a 7 % gross and a 0,2 % cost, the account compounds at 6,8 %, not at 7 % minus a 0,2 % at the end.

Can the cost of a transfer be measured?

Not directly. The account assumes a constant annual cost over the whole term, and a one-off subscription or redemption fee is not an annual cost. It can be approximated with an equivalent annual cost, and the figure that comes out will then be an approximation of an approximation.

Does the account round the results?

No. The calculation keeps all of its decimals and the rounding happens when the figures are presented. That is why a difference of thousands of euros may appear with decimals. Those decimals are not noise: they are the effect of the order in which the cost is deducted.

Are percentages written with the % symbol?

No. All percentages are entered as numbers: 0,2 means 0,2 %. Writing "0,2 %" causes the field to be flagged as invalid and the figure to disappear, instead of the calculator correcting the figure on its own.

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