High fees erode your investments

New middlemen mean today’s investors are paying more fees than previous generations

They say that too many cooks spoil the broth. But what do too many middlemen do? In the investment value chain, they raise the fees. Twenty years ago, an investor or trust company would have paid a few straightforward fees with their investment. They might have paid a financial adviser or investment consultant but that would have involved either a once-off fee or a contribution-based commission of between 3% and 5%. Nowadays, the fees have proliferated into an array of extra costs hidden in the fine print of your agreement.

Platform fees now apply. Discretionary fund managers also take their cut of the money, usually as an “assets under management” fee. And many financial advisers now charge something known as a “trail fee”. It’s a so-called annual “advice” fee that is taken not as a percentage of your premium but as a percentage of your total accumulated fund every month. (See “What are all the deductions?”)

Asief Mohamed, chief investment of Aeon Asset Management, recently conducted some “back of the envelope” calculations to show the effect of new “helpers” in the investment value chain such as discretionary fund managers, independent financial advisers and platform fees into the investment value chain. His estimate is eye-opening: these extra charges reduce the estimated annual return of investment by at least onethird a year, he says.

Mohamed writes: “On the optimistic assumption that the gross return of, say, a multiasset portfolio returns inflation plus 5% over a 10-year to 50-year period, the direct fees of these ‘helpers’ will reduce the estimated annual return of 10% (consumer price index + 5%) by 35% to 45% per annum. This is not sustainable.”

Speaking to the Mail & Guardian, Mohamed said his calculations “illustrate the point that all the helpers in the value chain are eroding the returns on average by about 30%.

“It’s developed in having more helpers in the chain,” he continued. “Before, let’s say, 10, 20 years ago, the trust company [overseeing a pension fund] might have had a financial adviser, and the financial adviser would have taken a fee of, say, 3%. But they would have taken no trail fee of, say, 0.5%.”

Simon Brown, founder of Just One Lap, points out that, as inflation decreases, so the investor is harder hit by the extra fees. “One client has gone from 5% above inflation to only 1.5% above inflation. In other words, their wealth has been decimated,” says Brown. “This is a very important point. In the days of higher average inflation, say 9%, the fees may have seemed less bad but now with lower inflation and growth the fees are killing returns.”

And lower inflation isn’t the only thing that puts today’s investors in a worse position than those in previous generations. The platform fee is another modern woe that takes its toll.

“It wasn’t there before; it’s a new innovation,” says Mohamed. “It creates some sort of value in the sense that it aggregates funds on to one platform. The question is whether they reduce the asset management fees to make up for it.”

At the time of going to print, the Association for Savings and Investment Association was unable to respond to a query about whether it is standard practice for asset managers that use platforms to decrease other fees commensurately.

Brown says that “platform fees really are a scam”. He is especially disparaging about those platforms that charge a fee for a percentage of assets managed. “They should charge a flat fee,” he argues. “It costs no more to manage R1000 versus R1-million on a platform. They’re all just journal entries with a different number of zeroes.”

But Shaun Duddy, an actuarial analyst at Allan Gray, argues that some fees are worth paying. “It is important to consider the overall value-for-money that you get for any given investment, rather than focusing exclusively on the fees you pay,” he told the Mail & Guardian in a June interview.

“The best way for investors to compare options is the long-term, afterfee returns that they can expect from different options.”