Expenses eating your investments?
One of the controversial areas in investment is still fees. Regulatory bodies have been aggressively forcing asset managers to disclose fees in a manner that is easily understood by their investors, but concurrently there should be an education program so that those investors, especially the smaller unsophisticated investor, to understand what fees are being charged, and for what. Everyday I come across clients who either are completely obvious to the fees that they are being charged – or assume that the advisor or broker gets it all. The requirement for the disclosure of Total expense ratios (TER) was introduced in April and July 2007. (The Life assurance industry doesn’t call it TER, they call it ‘reduction in yield’)
On any quotes you now get, the fees have to be clearly and prominently displayed, and broken down into the 3 major categories: Platform ( admin) fees, Asset manager fees and Financial advisor fees. The really grey area is ‘performance fees’ – but more about that later. These are collectively measured under what is called TER – Total Expenses ratio, expressed as a percentage. Total costs divided by total assets. Unfortunately in South Africa this is not an ‘all in fee’ and some costs are still ‘hidden’.
Platform or admin fees are the fees paid to the ‘platform’ aka financial institution who is ‘housing’ your investment. This could be a LISP provider (Investec, Alan Grey, Momentum wealth etc), an insurance company (Liberty, Discovery etc) as well as banks and a variety of other Financial Service Providers.
Asset manager fees are paid to the managers of the collective investment or stock portfolio that you have chosen to invest in, for example Coronation Capital Plus, Investec Equity or Stanlib Property. Those asset managers buy the investments that are the core of the investment. A stockbroker is usually also your asset manager. Collective investments are large pools of shares which allow individual and small investors to get the advantage of diversified investments (in equity, property, offshore, bonds, cash) without having to buy the shares themselves. If you want to build your own diversified share portfolio, it will take hundreds of thousands. Most experienced stockbrokers, for example, will not take on a portfolio that is less than R1m. “Fund of Funds” have got a bad reputation for high fees, and are rarely referred to as such anymore, but believe me, they are still there, in full force. Instead of buying the underlying shares in these collective investments, they buy other collective investments and bundle them into one – and charge their own asset manager fees on top of that (of course). The problem is that if the ‘asset manager’ fees in the collective investment can’t be negotiated down, those fees start to spiral out of control.