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The F-word: what fees do you pay as an investor?

Published Dec 19, 2021

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By Johann Rossouw

Fees is the F word that strikes fear in the heart of any investor. We work hard to save money to put aside for investing purposes and our goal is to see our capital grow. So if the subject of fees hasn’t come up with your adviser, avoid bad habits by unpacking the topic until you are satisfied with the answers.

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Begin by asking the right questions:

• Are you aware of how much you are currently paying for your investments?

• Are you receiving value for money?

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• What is the impact of fees on my investment portfolio over the long term?

• And why is the salesman that sold me an old-generation retirement annuity (RA) 30 years ago driving a Ferrari while I need to work until age 70?

Broadly speaking, there are three types of fees charged within investments: investment management fees, administration fees, and financial advice fees.

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1. Investment management fees

This is the fee paid to the investment manager of the fund you are invested in. It covers a variety of things, such as the cost of running the fund, transaction fees generated when the fund trades an instrument, auditors’ fees, the salaries of the fund managers, and performance fees where applicable. This fee will not be shown as a separate line item on your investment statement but will be included in the unit price of the investment. So, for example, if your investment fund’s minimum disclosure document states the performance over the last 12 months was 10%, this would be after the investment management fees have been deducted. Always look out for the Total Investment Charge (TIC) of the funds you are investing in. A higher TIC does not mean better or worse performance – it is just a standardised measure to determine the investment management fee a fund charges.

2. Administration fees

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These fees are paid to the administration platform, or linked investment service provider (Lisp). A Lisp is a platform that provides you with access to a variety of investment funds and products, such as RAs and living annuities. The Lisp also takes care of reporting requirements, such as your investment reports and annual tax certificates. For this function, the Lisp charges an administration fee which is deducted from your investment. For example, if you invest R100 000 with a platform that charges 0.40% per year, your total administration fee for the year will amount to R400, or about R33 per month. This R33 will be shown on your monthly investment statement.

3. Financial advice fees

The term “broker” is generally accepted to mean someone who can only give advice on and sell the products of one provider; they are also known as “tied” agents. A “financial adviser” or “financial planner” is generally someone who considers the client’s needs and seeks out the best products to meet those needs from a range of providers.

Tied agents work on a commission-based structure, which is built into the pricing of the product that is sold. This applies especially to life-insurance based products, such as old-generation RAs and endowment policies. Historically, commissions have been lucrative and have incentivised sales and this is why some brokers have ended up with a bad reputation.

A fee-based financial adviser, on the other hand, charges the client directly with an upfront fee, an ongoing fee or a combination of the two. The ongoing fee is typically charged to implement and monitor the client’s financial plan, ensuring that the client is on track to meet his or her goals over time.

Like administration fees, the financial advice fees will be deducted from your investment and will be shown on your investment statement.

Effective Annual Cost

In 2016, the Association for Savings and Investment South Africa (Asisa) introduced a new measure to compare the fees across investments in South Africa – the EAC (Effective Annual Cost). Under this system, the fees charged by brokers have become more transparent and comparable. This has led to a drive towards lower fees, which is a good thing for one main reason: compound interest.

For example, Smart and Lazy both need to invest R100 000. Smart gets access to a low-cost platform through her adviser, who charges an ongoing fee of 0.5% per year. In total, Smart pays 2.00% per year. Lazy, on the other hand, invests in the same fund, but through a product that has higher fees, and ends up paying a total of 3.5% in fees per year.

Over 20 years and assuming a return before fees of 11%, Lazy’s investment will have grown to R424 785, while Smart’s will have grown to R560 441 – a difference of almost R136 000, about 32% more.

The EAC report is mandatory on any investment product bound by Asisa’s rules. Make sure you understand what you are paying in fees by reviewing your EAC report. Then research all the possible alternatives available. An educated investor is an empowered investor. When in doubt, seek advice from a professional, qualified financial planner.

Johann Rossouw is a Certified Financial Planner at Fiscal Private Client Services in Cape Town.

This article first appeared in the 3rd quarter 2021 edition of Personal Finance magazine.

Related Topics:

Investing

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