A massive shift in investment fees needed
Fees are a reality of life; we have to pay for the services we receive. In the f inancial space, fees have been under pressure for a while, especially in the last 10 years or so. I still remember paying over 3% to buy shares way back in the 1990s and now I pay under 1%.
We’ve seen even more pronounced r eductions i n t he unit t r ust a nd retirement annuity spaces (the latter was frankly an absolute rip-off for many years until independent actuary Rob Rusconi exposed just how bad they were in a report he published in 2004). In some cases, fees were reducing the value of the retirement annuity by over 40%. Unit trusts were also creaming it as t hey charged platform, adviser, management and performance fees that in many cases resulted in a total fee of over 5% a year. Great for the unit trust managers and advisers, not so great for the investors.
This has all changed for the better and will continue to improve, but what is still needed is a massive shift in how the fees are determined: why are we still paying fees based on a percentage of the assets? For example, a platform fee will be 1% of value of your funds and hence the more you have the more you pay.
Now, if you went to the dentist and they charged you based on your net worth, it would seem insane, so why does t he f i nancial i ndustry charge this way? The argument is that the more you have, the more time it takes to manage it all − this is most often nonsense. Sure, an asset allocation for R1m would have a few extra options compared to just R10 000, but a 100 times more effort? No chance.
The other issue is the layers of fees. Firstly, there are the adviser fees, then the fund management fees that will potentially also include performance fees ( but only paying the managers more when they do well, when they do poorly it’s tough luck for you). Lastly, there is a platform fee, and it adds up.
The deepest irony is what passive platforms − such as exchange-traded fund (ETF) and unit trust platforms − where all the provider does is send out quarterly statements, charge. In my case I pay over R4 000 a year to my passive ETF platform provider; in short, I pay some R1 000 for every quarterly statement. Now, sure, there is a cost to manage the platform and send me those quarterly statements, but what I am charged has zero bearing on the actual cost incurred by the provider. This is my gripe.
By all means charge me fees, but charge me fees that are realistic, not fees that are designed to fatten the pockets of platform owners.
Moving to the adviser, they should be paid a f lat hourly rate negotiated between client and adviser. Percentagebased commissions are just wrong.
Lastly, i n t he long l ist of t hose charging us, what of the performance fees we pay asset managers? Sure, i f t hey do great t hings with our investments, they deserve some reward. But what of the lean years when they underperform and leave me poorer? They forfeit the performance fee, but they still get a management fee so how about refunding some of the previously paid performance fees? Even better, i nstead of an annual performance fee, why not a t hree- or f ive-year performance fee paid in arrears? After all, investing is a long-term game, not one measured in single years.