Investment platforms need to come clean about their fees

An alphabet soup of fund classes makes it hard for you to understand what exactly you pay if you invest through an investment platform. Laura du Preez reports

Past practices, impending regulation and competition for business have made it far more difficult than it should be for you, the investor, to understand investment platform costs.

Investment platforms face being compelled to be more transparent about their fees, and most are taking steps in the right direction, but, in the meantime, there’s an alphabet soup of fees for funds listed on investment platforms and an array of administration fees that defy transparency.

The assets under management on investment platforms, or linkedinvestment services providers ( lisps), continue to grow. PSG’s analysis at the end of the quarter to September 30, using Association for Savings and Investment South Africa statistics, shows that 46.5 percent, or R966 billion, of the R1.8 trillion invested in South African collective investment schemes is now invested through platforms.

You can use an investment platform to choose the underlying investments – typically unit trusts, but, in some cases, also shares, exchange traded funds and structured products – for a discretionary investment, retirement annuity (RA) fund, preservation fund, living annuity or endowment policy.

Paying the lowest fee is a combination of finding the lowest platform administration fee and the lowest fund or asset management fee. But instead of fees that are easy to understand and compare across platforms, you will often find:

◆ A confusing array of fund fees, as shown by the alphabet soup of unit trust classes, which differ depending on:

❑ Your adviser (see “You may pay less if you invest through some advisers”, right); ❑ The platform provider; ❑ Whether the unit trust company pays rebates to the platform provider;

❑ Whether the fund or asset management fee includes the advice fee and the platform fee; and

❑ Whether the fund is offered by an asset manager that is part of the same company or group as the platform provider.

◆ Different platform fees, which depend on: ❑ Who your adviser is; ❑ Whether the platform receives a rebate from the unit trust company, and if it does, whether the rebate is used to offset the platform administration fee; and

❑ How much you invest.

REBATES MUDDY THE WATERS

Investing took a big step towards greater transparency with investment platforms, which offer an alternative to life assurance policies for investors who want to invest across multiple funds on a single platform.

But when investment platforms were launched in South Africa, unit trust companies, like many of their overseas counterparts, paid rebates, or kickbacks, to the platforms for listing their funds. The unit trust companies were prepared to pay these rebates, because they received bulk investments into their funds from the platforms, saving them administration costs. However, the unit trust companies did not reduce their fund fees.

The investment platform may use the rebate to reduce your platform fee, but you may not be told what the rebate is and how much of it is passed on to you.

It is much more transparent for the unit trust company and the platform to reflect their true costs, but if you invest in funds for which the platform is paid a rebate, the fund fee will be higher than it should be.

When publications such as Personal Finance highlighted the practice of paying rebates without these being disclosed or shared with investors, some investment platforms started passing some or all of the rebates on to investors, which resulted in lower platform administration fees. In some cases, you will be told the platform fee is reduced or waived, but you will pay a higher fund fee than you should, which cancels out the discounted platform fee.

Some platforms still retain the rebates on their income statements.

CLEAN PRICING

Many investment platforms are now trying to become more transparent by moving investors into funds with clean pricing. The fund fee reflects the asset manager’s fee for managing a fund class that receives bulk investments, and the platform receives only its disclosed administration fee and no rebates from unit trust companies.

Investment platforms will have to offer only clean fund classes if proposals in the review of investment and advice charges by the financial services regulator, the Financial Services Board, are adopted. These proposals were published last year as the draft Retail Distribution Review (RDR).

The RDR document proposes that rebates be prohibited and investment platforms be remunerated by way of an administration fee disclosed to, agreed to, and paid for by you, the investor. It says this will reduce conflicts of interest that could result from platforms listing only funds that pay the largest rebates. It will also reduce complexity and ensure greater competition.

However, some investment platform providers say their attempts to introduce clean-price fund classes ahead of the adoption of the RDR proposals are being stymied by the failure of some asset managers to register clean fund classes.

Most say new investments may be made into clean fund classes only, and they intend to close or phase out the older rebate classes.

Some platforms are switching investors into clean fund classes, where these classes are available, when they transfer funds from other platforms, while others are encouraging investors to switch.

Newer investment platforms, such as those established by Sygnia and Ashburton, say they offer only clean fund classes.

The investment platform with the highest invested amount is hosted by Allan Gray, according to PSG’s analysis. Allan Gray says 82 percent of the about R170 billion on its platform is in funds for which rebates are paid. Allan Gray discloses these rebates to investors and passes the full rebate – between 0.11 percent and 0.46 percent of the investment – on to its clients.

The second- largest platform, Glacier by Sanlam, with about R160 billion, and the third-largest, Old Mutual Wealth, with about R154 billion, declined to answer Personal Finance’s questions, saying only that they are working towards complying with the RDR proposals.

Investec, the first platform to begin the move to clean pricing in 2013, has less than 20 percent of the R130 billion invested through its platform in fund classes for which rebates are paid, while Momentum Wealth has about 40 percent of its R124 billion in rebate fee classes.

Discovery says more than 90 percent of assets under management on its platform for which it was receiving rebates have been moved to clean fund classes. Only 0.5 percent of the about R35 billion on its platform is in rebate fee classes, and it passes the rebates on to investors.

PSG says less than 40 percent of the R29 billion under management on its platform is in rebate fee classes. It says it passes the rebate, which ranges from 0.1 to 0.4 percent of the investment, on to clients.

Among the 10 largest platforms, Absa Investment Management Services, with about R53 billion invested, and Alexander Forbes, with about R48 billion, do not pass on the rebates they receive. They say less than five percent and 10 percent of the assets under management on their platforms respectively are in funds for which they receive rebates.

Absa says most new investments are made into its clean-class funds, and it plans to close down the rebate fee classes.

Alexander Forbes says it discloses to investors that it does not pass the rebate on to them. It uses the rebates to provide enhanced benefits and reduce the platform administration fee.

Lisps deduct platform and adviser fees from your investment by selling your units.

Some investment platforms also have an “all-in” fee class. In this case, the fee paid to your adviser and the platform administration fee are included in the fee that is deducted from your fund before the net asset value of your units is calculated.

The “all-in” fee class is also likely to be phased out on investment platforms, because the aim of the RDR proposals is that you know exactly what you pay for each financial service and product. “All-in” fees make it difficult for you to know the fund fee, the advice fee and the platform fee, and to compare these fees.

If a platform urges you to move your investments to a clean fund class, this should result in you paying the same fees or lower fees, and the move should not trigger a capital gain on which you may be liable for tax.

Michael Summerton, the product development manager at Allan Gray, says that, in rare cases, a switch from the rebate fee class to the clean class of an offshore fund may trigger a taxable gain.

If your RA policy was taken out before April 2011, switching fund classes should affect your compliance with regulation 28 of the Pension Funds Act.