Complex layers of fees make it easy to get lost in the investment jungle

● There’s nothing simple about the many fees charged by the investment industry or the way they are disclosed to investors.

If you invest in a unit trust fund, you may be aware that you will pay an asset management or investment manager fee and a fee to your financial adviser, if you have one.

Your fund may charge its asset management fees as a base fee, or as a base amount plus a performance fee. It is difficult to assess whether performance fees are fair because you need to be familiar with the hurdle or benchmark above which the fee applies, the percentage of the fee applied to returns above the hurdle, and whether or not the fee is capped.

In addition, the performance fee should be structured so that when the manager underperforms, that performance recovers any lost ground before the performance fee applies again.

If you invest in a retirement annuity with underlying investments in unit trusts, you could also be in for a policy or administration fee that covers the costs of running the retirement fund, and a platform fee if your retirement annuity offers you a choice of funds.

In some cases, fees for platforms will be waived if you invest in the unit trusts offered by the asset manager in the same group as the platform.

If you invest in a retirement annuity with a life assurer, you could find yourself also paying fees for the likes of a loyalty bonus or a guarantee on your capital or returns. You may also incur a penalty for stopping or reducing your contributions before the agreed term.

If your financial adviser makes use of a discretionary investment fund manager to structure your portfolio — including one inside a retirement annuity — you could also be paying a fee to this manager. Discretionary investment fund managers argue that they are able to reduce the asset managers’ fees and in total you should not be worse off if you have both managers, but it is hard to know if this claim is true.

If your unit trust fund is a fund of funds, you could be paying investment fees on the underlying funds as well as a fee to the fund of funds manager.

Recently, the Association for Savings and Investments introduced a standardised cost measure, the effective annual cost, that its member unit trust, asset management and life assurance companies are required to disclose. This makes it easier to make sense of the charges when you receive a quote from an Asisa member, but this disclosure is not mandatory for all financial services companies.

Your quarterly statement from your investment provider should show your costs as actual rand amounts deducted, but it is easy to dismiss these if they appear small.

You need to be aware that they have a much larger impact on your returns over time because of compounding. What may seem like a low annual fee of 3.23% will reduce your final payout on a 20-year lumpsum investment by 35% relative to a 1% annual fee.

In fairness, the Asisa initiative has lifted the lid on charges and already begun to drive down the costs levied by some providers, but the costs on investment products remain excessively complex.

Passive managers such as 10X Investments are vocal about the effects of high fees, excessive complexity and obscure disclosure on investments. 10X describes the topic of fees charged by active managers as the “elephant in the room”, because they so obviously erode value, yet the industry is coy to tackle the topic.

“This is an industry that people trust blindly, but it should not be trusted at all,” says 10X CEO Steven Nathan. “This is an industry that has to be told to treat customers fairly, hence the legislation.

These are the people looking after your life’s savings.”

Quaniet Richards, the head of institutional investing at Nedgroup Investments, was recently quoted as saying that while the reforms introduced by the Treasury to improve governance, reduce costs and improve fee disclosure in retirement funds, are encouraging, members of funds are still unaware of the costs levied on their savings.

On the topic of low-cost passive funds, Richards says not all are equal and cheaper is not always better. “More cases are emerging where fees disclosure is misleading or inaccurate . . . Underlying charges are being charged that aren’t disclosed,” he says.

This is an industry that should not be trusted at all Steven Nathan CEO, 10X Investments