Time To Understand Costs

Time To Understand Costs

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If you look at the website of the Association of Collective Investment schemes and you look through the total expense ratios there – which are the costs you would pay – some of those funds of funds are charging 4% or 5% costs on a straight-through basis.

In a lower inflation environment, returns are likely to be lower and those fees therefore become a larger proportion of your return. Those costs might become even more painful if your fund makes a loss. The world of financial advice is changing rapidly – people don’t like paying fees unless they can see the value, and advisers are coming under increasing pressure to be more transparent and fair about the fees they charge.

Daryll Welsh, head of products at Investec IMS, says the most important factor when starting to invest is to understand each of those elements in the cost chain.

There are three layers of cost:

  • Financial advice costs – paid to your financial adviser
  • Product administration costs – paid to the investment platform
  • Asset manager costs – for managing your capital.

“Twenty years ago these costs were very opaque, with upfront costs being paid to your financial adviser and the admin cost varying according to the type of product, especially insurance savings products, where costs were embedded within the product and not visible,” says Welsh.

Though huge improvements have been made in this regard, investors still need to be vigilant. In most cases, the financial adviser may charge 0,5% to 1% and fully disclose this on monthly statements. Another 0,5% to 1% may come off for admin fees and this too would be fully disclosed.

“The asset manager’s fee would typically get accrued in the price of the fund, and would therefore be reflected in the market value of the portfolio. However, there are cases where the asset manager pays a bulk rebate to the administrator, which pockets part or all of it instead of passing it back to the client,” adds Welsh.

“Even this practice is dying out under public scrutiny, but it still occurs in cases where administrators appear to be passing the benefit to their clients in the form of a reduction in their fees, but the client isn’t aware the reduction is due to a rebate and simply thinks his administrator is being efficient. In other words, it is not fully transparent.”

 

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Some administrators such as Investec IMS are moving to what is termed ‘clean funds’. These are the same as traditional ones except they include no commissions for financial advisers, supermarkets or brokers — just the fee levied by the fund manager.

Mike Lledo, chief executive officer of Consolidated Financial Planning, says: “The challenge for financial advisers will not only be to justify the value add of their planning advice, as does any professional, but to also seek out and recommend to clients the most appropriate product solutions.

This will necessitate an understanding and communication of the costs, returns, service levels, and ultimately value for the client. Taking this a step further, there are also opportunities for advisors with scale, to negotiate a better deal for their clients, not only saving costs for their clients but further adding value to the implementation of their advice.”

Clean funds are being created by fund houses in response to the huge shake-up in the way financial advice is delivered — the trend towards advisers receiving advice-based commission rather than taking commissions or so-called ‘trail fees’ that could influence their recommendations.

Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.