Deregulation of the unit trust industry means that the small investor may have to pay more to management companies Sarah Bullen Earlier this year the unit trust industry was given the flexibility to restructure its products into different classes. As part of the deregulation of the industry, the Association of Unit Trusts (AUT) and the Financial Services Board agreed to allow unit trust management companies to recognise that they deal with different categories of investors – from indivuals to massive institutional clients – and to differentiate their products and their fees accordingly. Unfortunately for the small investor, this means that fees are going up. And there could be very little to stop the rise other than market forces. It is key to recognise that unit trust management companies are in the business of marketing as much as they are in the business of managing money. There are 31 management companies in South Africa, and to a large extent, they offer much the same product: they take an investor’s money and promise to manage it within the chosen market sectors. For the investor, buying into unit trusts may require little more than picking the fund from a glossy brochure. Thereafter it is over to the professionals. But the management company is selling exactly the same product to you that it is selling to major institutional investors.
It is not difficult to surmise that it costs the lll management companies significantly more to process 2E000 debit orders of R500 a month each than it does to process a single order of R1-million. Firms taking on individual investors are dealing with smaller amounts of money, requiring more effort, and providing the same level of professional management as a major client receives. Knowing this is key to understanding the changes in the industry.
There are now three divisions: Class A targets the individual investor – an investor with less than R5-million under management. Class B is for the large institutional investor. There is an R (regulated) class that broadly includes all the schemes that still fall under the old industry regulations. And there is scope for firms to set more classes.
The new classes are deregulated, which means there is no longer a protective ceiling on fees. This is not exactly good news for the small investor who has been protected by a 1% plus VAT cap on management fees. There is no doubt that management fees that have not already risen, will shortly. AUT executive director Colin Woodin is the first to admit this. “In terms of costs, the small investor is not going to get a better deal,” he says. Liberty Unit Trusts started to use multiple classes this month. This has meant that its management fee for small investors has risen from a 1,15% annual management fee to 1,92%.
But Liberty Unit Trusts’ communication manager Adri Malan says that the change has allowed it the flexibility to offer better service to smaller clients. Factored into the 1,92% management fee is a 0,55% commission that Liberty now pays to the brokers who sell its products to investors.
Malan says often brokers woo investors into buying unit trusts, but once they have, they largely ignore the investor. But management firms have been slow to take up the deregulated class system. Woodin says that while the change is a good move for the industry and investors, he admits: “There is a little confusion.” He says that only four of the unit trust management firms have moved on the new class system. Added to that confusion, some firms that have made the move have only included some of their products. Liberty, for example, is offering the new cost structure only to new clients, while keeping existing ones on the old regulated system. Old Mutual Unit Trusts MD Pieter van Niekerk admits that the new system may well create a great deal of confusion. This sentiment is echoed by brokers, who say it is creating a nightmare situation where there are just more and more categories and divisions, making it almost impossible to structure linked products.
They say it may happen that linked product service providers (LISPs) may set their own limits. One option is simply to trade only within Class A products. This will certainly be in their interests as there is nothing stopping LISPs putting a management fee on top of the costs levied by the unit trust management companies. The best-case scenario for the small investor would be a price war developing with management firms cutting costs to secure their business. But all indications right now are that, in terms of price, small investors have drawn the short stick.