Now, on in­vest­ment costs, you can com­pare ap­ples with ap­ples

Life as­sur­ers and unit trust com­pa­nies have tra­di­tion­ally had dif­fer­ent ways of show­ing the costs of an in­vest­ment. Un­der a stan­dard in­tro­duced by the As­so­ci­a­tion for Sav­ings & In­vest­ment SA, which comes into ef­fect to­day, you can more eas­ily com­pare what

Weekend Argus (Saturday Edition) - - FRONT PAGE -

From to­day, when you buy any re­tail in­vest­ment prod­uct, such as a unit trust fund, re­tire­ment an­nu­ity (RA) or en­dow­ment pol­icy, you will be pre­sented with a cost break­down de­signed to en­able you to com­pare charges across dif­fer­ent prod­ucts – in other words, to com­pare ap­ples with ap­ples. This new cost mea­sure is known as the ef­fec­tive an­nual cost (EAC).

The mea­sure has been in­tro­duced by the As­so­ci­a­tion for Sav­ings & In­vest­ment SA (Asisa) in line with the government’s drive to en­sure that in­vest­ment prod­ucts are more stan­dard­ised, trans­par­ent and con­sumer-friendly.

It ap­plies to all Asisa mem­bers, which in­clude both col­lec­tive in­vest­ment scheme man­age­ment com­pa­nies and life as­sur­ers. The im­ple­men­ta­tion of the EAC is be­ing rolled out grad­u­ally, but all prod­ucts sold from to­day must com­ply with it (see “EAC roll-out”).

James Ge­orge, the com­pli­ance man­ager at Com­pli-Serve SA, a con­sul­tancy that deals with com­pli­ance in the fi­nan­cial sec­tor, says the EAC is another step to­wards ful­fill­ing the government’s Treat­ing Cus­tomers Fairly reg­u­la­tory frame­work.

“It al­lows in­vestors and their ad­vis­ers to com­pare charges across dif­fer­ent re­tail in­vest­ment prod­ucts – for ex­am­ple, unit trusts and life as­sur­ance poli­cies. It also al­lows them to look at the im­pact of any charges on in­vest­ment per­for­mance. Ac­cord­ing to Asisa, it is likely a world first in its com­par­a­tive scope and cost trans­parency.

“For years, the South African sav­ings in­dus­try op­er­ated in si­los along prod­uct lines, with each silo de­vel­op­ing its own meth­ods of cal­cu­lat­ing and dis­clos­ing costs. In the case of the col­lec­tive in­vest­ments in­dus­try, the to­tal ex­pense ra­tio (TER) has be­come the stan­dard for cost dis­clo­sure, while in the life as­sur­ance in­dus­try the re­duc­tion in yield (RiY) cal­cu­la­tion is the norm.”

Ge­orge says the EAC does not re­place the TER or the RiY, but is another mea­sure of costs, aimed at help­ing you and your fi­nan­cial ad­viser to com­pare charges on most re­tail prod­ucts, and those within the var­i­ous in­vest­ment “wrap­pers”, to es­tab­lish the im­pact of charges on re­turns.

Un­der the new EAC stan­dard, Asisa mem­bers have a num­ber of obli­ga­tions. They must:

• En­sure that all the val­ues used in the cal­cu­la­tions are ac­cu­rate and com­pre­hen­sive, and that the cal­cu­la­tions are ac­cu­rate.

• En­sure that the val­ues un­der­ly­ing the cal­cu­la­tion don’t make a prod­uct ap­pear cheaper than it is.

• Use plain lan­guage that is ap­pro­pri­ate for your level of un­der­stand­ing, and it may not be printed in small type.

• Dis­close full de­tails of any re­bates paid between any par­ties, and whether they are passed on to you. When such a re­bate is passed on to you, the im­pact must be in­cluded in the EAC cal­cu­la­tions.

• Dis­close to you the fact that, if you buy a par­tic­u­lar prod­uct, you may forego cer­tain ben­e­fits.

The stan­dard ap­plies to lo­cal col­lec­tive in­vest­ment schemes (in­clud­ing for­eign schemes ap­proved by the Fi­nan­cial Ser­vices Board for mar­ket­ing in South Africa), con­tracts is­sued on in­vest­ment plat­forms, long-term as­sur­ance sav­ings con­tracts (in­clud­ing en­dow­ments and liv­ing an­nu­ities), as well as re­tire­ment an­nu­ity funds (RAs) and preser­va­tion funds.

The break­down is as fol­lows: •

costs and charges for the man­age­ment of all un­der­ly­ing in­vest­ment port­fo­lios;

• ini­tial and an­nual ad­vice fees, for both lump­sum and re­cur­ring- con­tri­bu­tion in­vest­ments;

• charges re­lat­ing to the ad­min­is­tra­tion of a fi­nan­cial prod­uct; and

• Ge­orge says this is a “catch all” for all re­main­ing charges, such as ter­mi­na­tion charges, penal­ties and charges on guar­an­tees, smooth­ing and risk ben­e­fits,

The EAC is cal­cu­lated sep­a­rately for each cost cat­e­gory and these costs are added up to cal­cu­late the to­tal EAC for the prod­uct. In ad­di­tion, the EAC must be shown for terms of one, three and five years, and, where there is a spec­i­fied term, for that term, or 10 years, or to age 55 for RAs.

From an ad­vice point of view, Ge­orge says, it’s clear that dif­fer­ent fi­nan­cial prod­ucts are used for dif­fer­ent needs. De­pend­ing on the wrap­per, they also have dif­fer­ent tax im­pli­ca­tions, all of which your fi­nan­cial ad­viser needs to take into ac­count when ad­vis­ing you.

Ge­orge says your fi­nan­cial­ad­viser must be able to ex­plain the EACs of the prod­ucts he or she ad­vises you on and be able to an­swer your ques­tions.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.