Ironically, the cost of running a broker force to encourage saving makes saving in a growth asset a poor investment. Investing money in a monthly unit trust could cost you as much at 7% a year after commission and management fees have been deducted.
Considering that, over the long term, equity markets only return about 15% a year and we have just come out of a bull run, your after-cost investment will, at best, be about 8%. This is less than current money-market rates, which means that investors who want to save a monthly amount could be better off eliminating risk and putting their cash into a money-market account.
I am certainly not advocating this as a prudent investment strategy, but something has to be done about how we sell investments in South Africa and the impact this has on our savings rate.
According to Di Turbin of the Association of Collective Investments, the vast majority of investments are made through brokers. The reality is that without this broker force we probably would not be saving the small amount we do. But by the time the broker has added his or her fee to the unit-trust company charge, individuals with R200 debit orders will be paying 5% fees upfront every month in addition to an annual 2% management fee.
In the strong bull run we saw over the past five years, this fee would have less of an impact, but going forward it is likely to wipe out half the return. One way of circumventing this enormous fee is to go directly to the unit-trust company. Companies such as Investec, Allan Gray and Coronation heavily discount fees for direct investments.
For example, Investec’s upfront fee is only 0,25% for a direct debit order. But, a company like Stanlib charges an upfront fee of 5% irrespective of whether you have used a broker. According to Stanlib this is because discounting fees impacts on brokers. The broker spends time offering advice and the client goes off and makes his or her own investments to bypass the broker fee.
The question Stanlib should be asking is whether the small debit-order business of R200 to R1 000 a month is really the space in which brokers should be operating in the first place and whether they are adding value for the client at this level.
Turpin points out that South Africans are generally nervous about investing without a broker. They do not feel they have enough financial knowledge to make these investments themselves. Investors are also obsessed with returns, wanting to be invested in the best-performing unit trust and continually switching and, therefore, wanting the advice of brokers.
On the flip side, brokers generally do not recommend unit-trust debit orders as the commissions are relatively low compared with life products. This is why there is an enormous skewing towards products sold through life platforms, where brokers can justify their fees by offering “advice” and receive trailer commissions. This leaves our savings industry in disarray.
Ask any financial guru and he or she will tell you that to start saving you need to have a debit order going off your account the minute your salary is paid in. This is the only way you will stay disciplined and save. Most parents want to start a savings fund for their children from birth and a debit order into a general equity fund is the best start. So why do we need someone to tell us this and charge a significant portion of our return to do so?
Studies show that whether you invest in the worst-performing fund or the best, over 20 years there is very little difference in performance as managers have their good and bad years. The key is to invest as soon as possible with as low a cost as possible. If you just invested R200 a month for 20 years and your investment performed in line with the market, you could expect to accumulate around R307 000 by the end of the period. If, however, you were paying 7% in fees a year, this return would drop to R119 000.
Cheaper savings
With South Africans so dependent on brokers to make them save, we are giving away a great deal of returns. If you save 3% a year in fees it really would not matter if you invested in the best- or worst- performing fund.
The key is to start saving today. Choose one of the major unit-trust companies, go for their general equity fund if you have a 20-year investment horizon or select their flexible fund if you like the idea of some asset allocation. Don’t be afraid of negotiating fees.
My personal experience with Stanlib is that unit-trust companies come to the party pretty quickly. Di Turpin of the Association of Collective Investments says no investor should be paying the maximum fees allowed and should negotiate.
If the company does not play ball go to another investment house. Fees have the biggest impact on long-term performance.
An alternative is index-tracking funds, such as Satrix or Umbono, which simply track the market rather than employing expensive asset managers to pick stocks, which provides substantial cost savings. Waiting for a broker to knock on your door will simply cost you time in the market as well as fees.