When investing and saving, performance and diversification aren’t the only factors to monitor. It’s also critical to understand how costs — which are a fact of life, and part and parcel of the process of investment – fit into the picture.
All investment vehicles have costs, whether you buy shares directly or invest in a unit trust or structured entity like a Retirement Annuity. Even an investment in physical property has costs, such as once-off transfer duties, payments to a managing agent or monthly levies.
Generally, within the financial services industry, fees on investments are payable to three parties:
Some of these fees will be paid upfront, while others will be paid for the duration of the investment.
You may be liable for a platform fee if you’re accessing a savings product/fund on a linked investment service provider (LISP).
A LISP is defined by the Association for Saving and Investment in SA as a “company that enables you to invest in a wide range of collective investment schemes, such as unit trust funds, via one source”. In other words, you might use Company A (a LISP) to purchase a unit trust from Investment Company B and a unit trust from Company C, or you might buy a retirement product from Company A that includes unit trusts from Company B and Company C. For example, Discovery Invest is a LISP – and Discovery Invest clients are able to invest with various fund managers via the Discovery Invest platform.
The benefit of using a LISP is that it provides one point of contact for the consumer, while providing access to a range of investment options. Also, as Asisa points out, another advantage of investing via a LISP is that the “collective investment scheme fees are often negotiated down significantly by the Lisp and the saving passed on to investors”.
As a rule, the fees charged by a LISP for the use of the platform are low but not insignificant. They’re also often forgotten as investors tend to only focus on the fees related to the fund. Most LISPs now charge ongoing fees rather than an upfront fee, although there are exceptions to this rule.
Asset Management Fees/Fund Manager Fees
Also known as the fund-manager fee or service fee, this is the charge levied by an investment manager for managing an investment fund. This fee can be a fixed fee, or performance-based (in other words, rewarding a manager for outperforming a pre-determined benchmark), or a combination of the two.
The asset manager fee is typically expressed as a percentage charged annually, and covers the costs of running the unit trust. However, there are more costs related to the management of an investment fund, and in order to make these clearer to investors, these are now stated as part of the Total Expense Ratio (TER), and will be published on fund fact sheets.
Like the platform fees, asset management fees are generally ongoing rather than upfront, although there are exceptions to this.
Financial Adviser Fees
These are the fees paid to financial advisers for advice – which will either be upfront or ongoing. Fees paid to a financial adviser are effectively for professional services rendered, in the same way that any other profession charges for advice. Warren Ingram, the executive director at Galileo Capital, says there are typically three ways that advisors charge clients.
The traditional model is where “advisers charge a percentage of assets advice”. In structured savings products, this is disclosed in detail on the application forms. On the opposite end of the spectrum is the model where investors pay advisors per consultation (effectively a rate per hour). And halfway between the two is the situation where the advisor is paid to develop an overall investment and retirement savings plan for a client, which the client then implements themselves.
Ingram says that in his experience, many of those who elect to follow this last option tend to return 6-18 months later and ask their advisor to take over the management of their investments. “There are many reasons for this,” he says, “sometimes investors realise just how intimidating and demanding this work is. Or there’s a realisation that they’re not suited to being this diligent.”
“There’s a considerable benefit of paying an advisor when you know the plan will be implemented.”
When comparing costs, it’s important to compare apples with apples. Thankfully, this is becoming easier. For most savings products (like unit trusts), the costs are typically disclosed as a total expense ratio (or TER), as mentioned previously. This figure – an industry standard, and one that is published on fund fact sheets – includes expenses such as:
• Management fees (including performance fees);
• Fixed operating costs (such as audit fees and bank charges); and
• Value Added Taxes
As part of efforts to simplify disclosure as part of the Financial Service Board’s Retail Distribution Review and to help consumers compare like for like, fund and product providers will soon start publishing a standard “Effective Annual Cost” or EAC, developed with the Association of Savings and Investment South Africa (Asisa). This will include management fees (currently the base of the TER), advice charges, administration charges, as well as any other charges (including termination fees).
Making your money work
It may be easy to see fees as a “necessary evil”, but remember that your money will still be working harder when it’s being actively invested. If you decide to keep your money under a mattress or even in a cash account, the fees will certainly be lower, but the returns will definitely be lower as well.
However, Ingram does suggest reassessing the fees you’re paying regularly – keep a tab on these in the same way you would your car or household insurance premiums – and make sure the fees you’re paying are comparable to the market.
For more information on investing for retirement, speak to your financial adviser.
This article is part of an investment series by Discovery Invest.