Fund managers are warning us that we will be entering a period of low returns from the markets as the economic recovery is expected to be sluggish. Investors, fund managers tell us, need to readjust their expectations. No longer will we see returns of 12% to 15%, but rather closer to about 7%.
What this really means is that asset managers, financial advisers and products houses are going to have to re-look their cost structures if they want to retain investors’ funds.
To understand the impact of costs in a low-return environment, take, for example, a R100 000 investment. In an environment where the investor was receiving a 15% return, an annual product fee of 2% would have equated to 15% of their annual return — in other words, fees of R2 300 on a R15 000 investment return.
Now the investor only receives a 9% return. That 2% fee is now reducing the investor’s return by 24% — in other words the investor is paying away R2 180 of his/her R9 000 return. If there is upfront fee of 5% plus an annual fee of 2%, in the first year of investing the investor would only receive a 2% return, well below inflation and certainly less than they would have received in a fixed-deposit account.
If active fund managers and financial advisers want to retain their clients, their fees are going to have to adjust to the new reality.
Low-cost investment products like index-tracking funds and exchange-traded funds are going to become a great deal more attractive if active fund managers are not going to deliver returns in excess of the fees charged.
While we have already seen moves by asset managers like Investec and Coronation to lower fees on certain products, the industry needs to get fees under control because they are creating a disincentive to save.
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