Investment fees are on the way down

If you pay an investment manager to manage your unit trust investments, you will be pleased to know that the total cost of using an investment platform is set to drop to less that two percent in five years’ time. reports

The fees you pay investment managers to manage your unit trust investments are slowly decreasing and are likely to continue to do so.

Investors who use investment platforms and advisers have also seen big fee reductions – of about 30percent over the past 10 years.

An analysis conducted by RMI of net expense ratios on unit trust fund investments over the past ten years shows reductions of between 17 and 34percent. The net expense ratio is the cost of both asset management fees and operating expenses such as custodian fees and distribution fees.

RMI’s analysis included both institutional and retail investment fee classes. Institutional investors who invest large amounts of money are usually charged lower management fees than retail investors with smaller amounts to invest.

One of the country’s largest asset managers, Allan Gray, says asset management costs for a balanced fund accessed via an investment platform have reduced from 0.80 percenta to 0.70 percent over the past 10 years .

Jeanette Marais, a director at Allan Gray, expects the fees to reduce even further to around 0.60 percent over the next five years. SA General Equity SA Multi-asset High Equity SA Multi-asset Medium Equity SA Multi-asset Low Equity SA Multi-asset Flexible SA Multi-asset income SA Interest-bearing Short Term Global Equity General 2007 1.47% 2.04% 2.15% 1.99% 1.73% 1.17% 0.83% 2.39% There is a lot of evidence of managers making changes to their fees. Some of the biggest managers, such as Old Mutual, Sanlam, Investec and Coronation, have recently amended their fees.

Elize Botha, the managing director of Old Mutual Unit Trusts (OMUT), says OMUT changed its fees on its South African equity funds from January this year. OMUT’s local A-class equity funds, which were charging between 0.86 percent and 2.85percent a year, are now priced at 1.54percent (including VAT) if you invest directly and 1.14 percent if you invest via an investment platform.

Botha says the main reason for the change was to reduce complexity and introduce a highly competitive, 2016 1.18% 1.53% 1.66% 1.56% 1.43% 0.92% 0.55% 1.75% Difference in % points 0.29 0.51 0.49 0.43 0.3 0.25 0.28 0.64 20% 25% 23% 22% 17% 21% 34% 27% simple fee structure.

Carl Roothman, the head of Sanlam Investments’ retail business, says Sanlam Investments did away with initial fees on its unit trust funds last year. Sangeeth Sewnath, the deputy managing director of Investec Asset Management (IAM), says IAM reduced performance-related fees and fees on certain rand-denominated offshore funds and fixed-income funds in May last year.

Coronation Fund Managers scrapped performance fees where they still existed on its South African multi-asset funds, on three of its offshore funds and on its rand denominated feeder funds. In some cases, the flat fee increased when the performance fee was removed. Last management gains scale and becomes cheaper.

2. INCREASED TRANSPARENCY

Increased transparency about costs is also driving them down, says Ahern. Carl Roothman, the head of Sanlam Investments’ retail business, says fee transparency for unit trust funds is complete and all fees, including transactions costs, are now disclosed.

From October last year, a new measure of costs, the effective annual cost (EAC,) was introduced. As well as providing this, fund managers now provide the total investment charges (the costs of trading).

3. MORE COMPETITION AND GREATER ECONOMIES OF SCALE

Jeanette Marais, a director at Allan year, the company also changed the way performance fees are charged on its equity-based funds.

Allan Gray says the total cost of asset management fees and adviser fees for a unit trust investment on an investment platform has fallen by about 30percent over the past 10 years. Marais gives the percentage as 2.2 percent plus VAT in 2015, compared to three percent in 2005.

She says these price reductions happened over the course of one of the strongest bull markets in history, when asset managers were benefiting from the good returns investments earned from the market. Despite the current lower-return Gray, says there are now more managers and increased competition. Marais says competition, asset managers achieving economies of scale and more clients investing through investment platforms have all contributed to managers reducing their fees. In developed markets, there has also been consolidation of active managers,which has resulted in scalerelated reductions in fees.

Marais says managers with a strong brand or reputation can charge a premium, as do managers who limit the size of their equity portfolios in order to avoid diluting returns.

4. DISCRETIONARY INVESTMENT MANAGERS

Hinton says the negotiations of discretionary investment managers environment, she believes investment platform fees will go as low as 0.25percent in future.

Sewnath agrees that platform fees have almost halved, on average, from 0.75 percentage points to 0.40 percentage points over the last five years, depending on asset size. Anet Ahern, chief executive officer of PSG Asset Management, says there has been a 30 to 50percent reduction in platform fees over 10 years.

When it comes to adviser fees, Marais says the Allan Gray platform shows that average financial adviser fees reduced from 0.86percent to 0.83 percent in the decade between 2005 and 2015. (DIMS), who construct portfolios for financial advisers, have contributed to the lowering of fees. He says there are 32 DIMS in South Africa, advising on an estimated R100 to R200 billion of investments in unit trust funds – or between 10 and 20 percent of the total amount invested in South African funds.

DIMS are able to get managers to drop performance fees, he says, especially when they perceive the fees to be unfair – for example, when performance is measured against a performance hurdle that is too low.

5. CLEAN-CLASS FEES

What are known as clean classes of unit trust funds have been introduced on investment platforms where previously fees included the cost of rebates or

Advisers with clients on the Allan Gray platform are typically independent, while tied agents, who work for the likes of life companies, typically charge more than independent advisers, Marais says.

At PSG, adviser fees are negotiated on an individual basis, Ahern says, but there hasn’t been much change in these fees, which vary from 0.50 percent to one percent depending on the services provided.

Marais believes price reductions will continue and in five years time, the total cost of using an investment platform will be less than two percent a year of your total assets under management. kickbacks paid to investment platforms for listing funds. These rebates are now used to offer lower fees on investments in clean-priced funds, which Sewnath says are now widely available.

Investing in a clean-price unit trust fund on an investment platform could save you 0.3 to 0.4 percentage points, but you will also pay a platform administration fee.

Marais says none of the investment platforms is truly independent. Every platform in the South African market is connected in some way with an asset manager, life company, bank, wealth manager or a combination thereof.

Asset management, life and wealth management companies regard their investment platforms as strategic distribution channels and are happy to cross-subsidise their costs, she says. Ahern says about 50percent of balanced funds have a flat-fee structure and the rest have a flat fee and a performance fee. She says the base fees in this category range between 0.55percent and one percent. Some funds in this category have an uncapped performance fee, while the funds that have capped performance fees may have annual fund fees of up to 2.6percent. There are a few funds that have over- and under-performance fees.

Elize Botha, managing director of Old Mutual Unit Trusts, says nine managers who manage balanced funds representing 84percent of the assets in this sub-category charge flat fees ranging between 1.25percent and 1.35percent a year before VAT for direct retail investors. If you invest via an investment platform, the fees are typically reduced by between 0.3percent and 0.4 percent a year, although you will also pay an annual platform administration fee.

In the case of funds with performance fees, the flat fees range from a minimum fee of 0.5 percent a year to 1.25 percent a year before the performance fee is added, Botha says. The maximum annual fee, including performance fee, starts at 1.5percent a year plus VAT and there is no cap on how high some performance fees can go, she says.