An investment first for South Africa

South Africa’s first independent exchange-traded funds (ETF) investment platform for financial advisers, itransact, is set to launch in Gauteng this month and in Cape Town next month.

The brainchild of economist Iraj Abedian, chairperson of Automated Outsourcing Service, trading as itransact, the platform purports to provide an ideal way for investors, together with their financial advisers, to select the appropriate ETFs to meet their investment needs.

ETFs are investment funds listed on a stock exchange — their purpose is to track an index. When you purchase an ETF you effectively own the shares of a fund that replicates the index’s performance by tracking its return. This “passive management style” makes ETFs both low-risk and low-maintenance, since there is no manager actively trading assets to outperform the market.

“In simple terms, ETFs don’t try to beat the market; they are the market,” says itransact’s business development director, Lance Solms.

Unpacking the fee structure
According to Solms, the fee structure will work like this: the cost of administering an ETF bought through itransact differs from that of buying ETFs directly from ETF providers such as Satrix, Absa Capital, and Nedbank Capital, for example. This fee differential is a consequence of the cost of distributing ETFs to financial advisers. “We have based the platform on the way in which securities, such as ETFs, are successfully distributed in the US,” says Solms.

Over and above the annual administration fees (which are identical to that of buying an ETF directly from an ETF provider), an additional fixed monthly administration fee will be levied to facilitate the continual supply of current and future ETF products to financial advisers in one convenient place, and offering services such as providing consolidated valuations across entire ETF investment portfolios, making investment choices easier for investors.

Itransact will offer switching between your ETF holdings at any time. The switching service will be free of charge.

Annual administration fees are based on a sliding scale and cater for costs such as that of the nominee, whose prime function is to register the ETFs in the investor’s name as well as to protect the investor’s assets.

Solms was not at liberty to disclose more detail on costs until after their inaugural launch on August 31 2010 in Gauteng.

Advice fees
When it comes to advisers, there are, of course, advice fees. “Advice fees are negotiable between the advisory and the investor. Advisers can use ETFs as an additional and complimentary investment alternative which may form part of their holistic investment approach when it comes to providing advice on their clients’ portfolios,” Solms says.

He explains that advisers will be allowed to charge up to 3% as an initial advice fee and up to 1% per annum as an ongoing advice fee. “This is a fair way for advisers to charge advice fees since it aligns investors’ interests with those of their advisers by allowing the investor to cancel the advice payments should they not be satisfied with the advice they receive,” he says.

The main benefit for investors lies in the fact that it is generally impossible for an ETF to under-perform the market. The passive management style of ETFs is therefore a key money-saving factor.

“A major reason why ETFs do not have greater market share among retail investors is due to a limited awareness of ETFs by investors,” Solms contends, adding that itransact will seek to change that by exposing ETFs to investors through financial advisers.

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