Why an extra R10 a month in fees can be a big deal in SA

South Africa has a well-known savings problem. As a population, we are over-indebted and under-invested.

The conundrum, however, is that this often conflicts with the priority of ensuring that those who do invest are protected and that their money is safe. Financial services companies have to comply with a huge number of laws and regulations to ensure stability in the system and that investors are looked after.

Unfortunately, this compliance comes at a cost. It is increasingly expensive to maintain the staff and infrastructure required to offer a financial service, which means that as South Africa has been trying to make investing more inclusive, it has concurrently been making it more expensive.

Boutique Collective Investments (BCI) is introducing an additional fee for clients with a balance of less than R100 000.

From October 1, the management company will charge these investors an extra admin fee of R10 a month (R11.50 including VAT). This will not, however, affect anyone who invests in BCI funds via a linked-investment service provider (Lisp) platform, or those who use BCI’s online service BCI Transact.

Most of BCI’s funds are co-branded and managed by smaller South African asset managers. Its partners include 36One, Anchor Capital, Efficient Select and Imara.

Robert Walton, BCI CEO, says the charge is necessary to continue to deliver a quality service.

“On a R1 000 per month investment the retail service charges on most of our funds range between 0.25% and 1.0% per annum, of which a portion accrues to BCI for rendering the administration and compliance services,” he explains.

“So the service charge ranges between R2.50 and R10 a year, which is between R0.20 and R0.83 per month. Of this only a small portion accrues to BCI – on average less than R1 per month on R1 000, or R10 per month on R100 000. As you can see from these numbers, it is impossible to render any reasonable decent service for this kind of money.”

Even by including this charge, Walton says they will still be serving these clients at a loss. “Our variable cost break-even is only at about R1.2 million,” he points out.

The problem is what this means for clients. For someone who starts with zero and wants to invest R500 per month, this R10 charge would mean they are paying an extra 2% in fees. Even at a balance of R10 000, an extra R10 per month is an additional 1.2% per annum. On R50 000 it’s an extra 0.24%.

These are not insignificant numbers when comparing costs across providers. No rational investor is going to pay an extra 2% when they can invest the same amount somewhere else without incurring this charge.

BCI does at least offer its online service as a solution to anyone who has less than the R100 000 threshold, as the R10 charge will not apply on BCI Transact. “These are people who do not want to use a financial advisor and we automatically register them online,” Walton says.

“They can access the service via their mobile phones. Bear in mind that most other management companies have minimum investment amounts and thus automatically exclude these clients. From October we won’t have minimum investment amounts – we will accept anyone.”

However, in South Africa not everyone can transact online and not everyone has R100 000 to put away. There is therefore still a huge part of the population excluded by this decision. Regulators and legislators need to consider ways of lightening the cost of compliance for entry-level investors so it’s more profitable for asset managers to service them.