Paying for value

Everyone agrees that returns from equities will be subdued. However gone are the days of 15% to 20% returns. Fund managers are asking us to temper our expectations, but are investment houses tempering their fees?

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 equate to 15% of the annual return — in other words, there would be fees of R2 300 on a R15 000 return on the R100 000 invested.

Now the investor receives only 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 an upfront fee of 5% plus an annual fee of 2%, in the first year of investing the investor would receive only a 2% return, well below inflation and certainly less than he/she would have received in a fixed-deposit account.

However, the reality is that for many investment products, investors pay well above 2%. In the unit trust space alone, there are total expense ratios (TERs) in the region of 3,5%. For example, one fund of funds carries a TER of 3,56%. The fund aims to deliver CPI plus 6% — that means it aims for a 12% return. The TER would then account for 30% of the return. In the past three years this fund delivered only a 2,86% return to its investors.

There are many good investments and unit trust companies that deliver performance at reasonable costs; however, there are also those that — through performance fees, multiple product fees, platform fees and advisory fees — are taking far more than their fair share and adding very little value.


The worst culprits are those investments that have layers of costs due to packaging. An example is broker fund of funds that invest in underlying unit trusts but carry additional fees for managing these portfolios.

Unit trusts are often sold through linked investment service providers (Lisps), which supposedly give the client the flexibility to switch — but at a high cost that often includes undisclosed trailer fees. These may then be further wrapped into a life product to provide tax benefits — but, again, the costs often mitigate any tax benefit.

And finally, there are adviser fees, with some advisers taking percentages at every level of investment, and these costs are not always transparent to the investor.

Ironically, when it comes to this laying of fees, often the asset manager who is making the investment decisions and investing directly into the market is paid the least in the food chain. For example, a white-labelled fund managed by a niche asset manager has an annual fee of 1,52%, yet the asset manager receives 0,42%, compared with the 0,5% paid to the broker.

Investing creates wealth and one needs to be careful that you do not throw the baby out with the bath water, but we also need to be vigilant about getting value for money and also realise that investing can be very simple.

We do not always need the complicated products that can erode value and line the pockets of the financial industry.

Over the next few weeks we will take a closer look at:

  • Fund of funds;
  • Investment platforms;
  • Performance fees;
  • Pension fund costs (especially for smaller companies);
  • Trailer fees; and
  • Life wrappers.

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Maya Fisher French
Guest Author

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