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

Weekend Argus (Saturday Edition) - - GOODPOSTER -

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.


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.


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.

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