A mas­sive shift in in­vest­ment fees needed

Finweek English Edition - - INVEST DIY - BY SIMON BROWN

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.

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