Now that new industry regulations are making it easier to see exactly what you’re paying in investment fees, it’s time to consider if what you’re paying is really worth it. It’s an exercise that could, according to Treasury, prevent you from losing as much as 60% of your end investment.
Now that new industry regulations are making it easier to see exactly what you’re paying in investment fees, it’s time to consider if what you’re paying is really worth it. It’s an exercise that could, according to Treasury, prevent you from losing as much as 60% of your end investment.
The full spectrum of fees charged on investments is now becoming more transparent and accessible, thanks to last month’s introduction of the Effective Annual Cost measure (EAC), which is a standardised disclosure methodology that can be used by investors to compare charges on most retail investment products, and their impact on investment returns, across the various regulatory wrappers.
While most investment firms are still figuring out ways to make the EAC calculations user-friendly and get it up onto their websites, Niki Giles, Sygnia chief operating officer, says investors should be able to call their investment firm or broker to get their full EAC breakdown.
Once you know exactly what fees you’re paying and for what, Giles says the next step should be to evaluate if you’re getting real value for your fees.
In South Africa, fees usually average 2.75% plus VAT of your investment: 0.075% for advice fees; 0.5% for administration; 1.5% for investment fees. On top of this, you may also be paying performance fees, and this is where you really need to see if you’re getting value for money, says Giles.
“That’s not to say you should never pay performance fees,” she emphasises, “but that you should always question whether the cost is justified.”
Giles believes performance fees are only justified if the asset management fee is low and the fund managers are consistently outperforming on their benchmark. “If the fund managers are doing exceptionally well, then it makes sense that they are rewarded, because there is a lot more effort and intellectual capacity involved than passive management,” she explains.
But when it comes to passively managed funds, like Sygnia’s Skeleton Unit Trust Funds that only charge an asset management fee of 0.40% per annum, then Giles struggles to see any value in investors paying performance fees: “Passively managed funds are mostly index tracking. There’s not a fleet of people in charge of managing it.”
Giles is quick to point out that Sygnia also offers actively managed funds that carry performance fees, so the company is not anti performance fees: “We just believe that fees need to be justified, and earned.”
The active versus passive fund debate can get complex, but when it comes to performance and other active management fees, Giles says you can boil it all down to one question: “Can the fund manger you’ve picked outperform year-on-year versus a passive fund? If not, then maybe look at the latter because you could save a lot.”
And make no mistake, saving even a small portion of your fees can make a big difference to your end investment.
A recent Treasury report noted that if Joe Average reduced his annual investment fees from 2.5% to 0.5%, he would receive a benefit of 60% greater at retirement after 40 years. That’s not small change: it means Joe Average retiring with R1.6 million instead of R1 million.
Another factor to consider is that funds with higher charges are not always going to perform better than their lower-charging counterparts. In fact, according to fund research house Morningstar it’s usually the opposite. In analysis released in May, Morningstar found – and not for the first time – that funds with lower charges are more likely to out-perform in future, while those with higher charges are not only more likely to under-perform, but to shut down altogether.
It all begs asking the question: are you getting value for your investment fees?