Phantom Fees – are you paying to save?

You may be paying hidden fees that are affecting the true cost of your investment, says Niki Giles, Sygnia Financial Director.

There are many different types of fees charged in the investment space. These often depend on the type of investment you make, the product wrapper that you use and the method of trading.

Some of these fees are obvious, they are fully disclosed or you see them being deducted from your investment account each month.

Others are less transparent, and only visible if you know what questions to ask or understand how the product you have invested in is priced.

Often you may have been aware of a fee when signing up for a product, but because of the method of charging the fee, you don’t see it being deducted from your investments on a monthly basis and so you forget after a while what the true cost of your investment is.

An example of this is an investment into unit trusts via a LISP (Linked Investment Service Provider).

On a monthly basis you will see fees being deducted from your investments.

These fees represent the LISP administration fee (and the brokers advice fee if ongoing fees are paid), however what you don’t see are the asset management and performance fees.

These fees are included in the price of your unit trust and taken from inside the investment. The same principle would apply when purchasing Exchange Traded Funds (ETFs) via a LISP or Stock Broker account, you will see administration fees being deducted, but the asset management fee is included within the ETF price.

Detecting Phantom Fees

Often the only possible way to detect hidden fees is to read all you can find regarding the product you are invested into and the administration platform providing it.

Often this will mean reading fund fact sheets relating to the underlying unit trust, terms and conditions documents for the LISP you may be using and carefully looking at all the fees you have signed for in the original application form.

Currently Total Expense Ratios (TER) and Transaction Costs (TC) are provided on fund fact sheets for unit trust investments, but these only include the fees charged within the unit trust.

A new standard is set to be implemented this year which should help with cost transparency. ASISA has developed 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.

The EAC is a measure of the charges that an investor will likely incur in purchasing and holding a financial product.

It consists of four separate components into which various costs are allocated, being (a) investment management charges (equivalent to the TER of a unit trust), (b) advice charges, (c) administration charges and (d) other charges.

The first phase of this standard is to be implemented by 1 October 2016.

What is helpful about the EAC disclosure is that it requires all costs (upfront, ongoing and termination fees) to be provided to the investor at the point of sale in a transparent manner.

Dealing with Phantom Fees

Fees and the fact that you are not aware of them does not necessarily mean that you are being robbed or that you need to disinvest.

Rather what is important is that you are aware of all the fees that you are paying or potentially could be paying and to whom these are being paid.

This will allow you to regularly evaluate your investments and to be able to compare them more accurately to alternatives available in the market if you are considering making any changes to your investment strategies.

To avoid hidden fees up front, you need to do your homework before you invest.

Ask your broker or phone the call centre of the service provider to find out exactly what fees are paid and how these fees are collected and remember to ask about exit or termination penalties.

Look out for EAC disclosures which will hopefully start being published in the last quarter of this year.