Why you should pay attention to Investment Fee’s

PUBLISHED: Mon, 21 Jun 2021 08:15:02 GMT
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This article is part of an ongoing series of basic financial education brought to you by financial industry professionals curated by PocketFin – The Financial School of Real LifeCNBC Africa provides content from PocketFin as a service to its readers but does not edit the articles it publishes. CNBC Africa is not responsible for the content provided by PocketFin.

Especially over recent years, the topic of investment fees has become a very popular one, especially with investment markets having severely underperformed over the last decade, its made investors search for ways to nitpick their statements and returns.

Investors are becoming increasingly aware of the (catastrophic) effect that high investment fees can have on their retirement lump sum.

But this knowledge leads to the next important question: How do we best compare investment fees across products? We believe it is important to understand all those complicated tables when comparing your investment proposals.

Photo by MayoFi on Unsplash

Effective Annual Cost (EAC)

This been introduced by ASISA ( The Association for Savings and Investment South Africa) to regulate the disclosure of investment and product costs across the industry. 

This number is meant to represent the total cost per year that you are paying away to fees (so it should catch all admin fees, platform fees, product fees, adviser fees, and total investment charges). The EAC is the most accurate measurement to see the true overall cost of an investment and is what most companies now display on quotes.

The EAC allows an investor to compare charges across suppliers, at a product level, and shows the effect of a client exiting an investment over specific periods, If you’re setting up an investment product and need to understand how much the total product fee is, ask for the EAC.

Make the EAC your new best friend when comparing investment products. 

Remember, if you are getting a return of 4% more than inflation and your fees are taking 4% away each year, you are actually not getting anywhere and just spinning your wheels. An EAC of more than 2.5% is probably starting to get expensive.

EAC Calculation Principles

EAC comprises of 4 components namely:

  1. Investment Management charge (IMC)
  2. Advice Charges
  3. Administrative Charges
  4. Other Charges.

Mandatory disclosure periods in years are 1 year, 3 years, 5 years and Term to Maturity (for retirement products) or 10 years when no term is applicable.

All charges are inclusive of VAT and will be rounded off (at launch it was prescribed to 1 decimal place currently being used).

Calculation Methodology for Each Component

1. Investment Management charge (IMC)

IMC includes all charges for the underlying investment – The Total Investment Charge (TIC) of a fund is utilized, where a TIC is unavailable a best estimate is used. IMC will utilize a simplified approach and is equal to the sum of the weighted average TICs.

2.Advice Charges

Advise will include Initial and ongoing charges, a simplified or a RIY calculation will be used as prescribed below.

3. Administration Charge

Administration charge component includes all charges that an investor incurs relating to the administration of a Financial Product. 

4. Other Charges

Other charges include the impact of termination charges, penalties or loyalty bonus payments that are reasonably foreseen if the investor terminates his or her contract, but not limited to these.

It is important when selecting investments that you are aware of all the possible costs, this ranges from the fund charges, advice charges, administration charges etc. At the end of the day, we all want the best possible return on our investments, especially over the long run where even an additional one or two percent compounded over decades can make a dramatic effect on your retirement lump sum.

https://pocketfin.co.za/

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