In­vest­ment: Know what you are pay­ing for

When choos­ing in­vest­ment prod­ucts, it is im­por­tant to keep in mind that in most cases there are costs at­tached to ev­ery in­di­vid­ual layer of the over­all prod­uct.

Finweek English Edition - - Contents - By Schalk Louw ed­i­to­rial@fin­ Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

ihave made sev­eral ref­er­ences to the Ma­tryoshka, or Rus­sian nest­ing doll, in the past be­cause I find it to be such a fit­ting anal­ogy to de­scribe in­vest­ment prod­ucts and the costs at­tached to them. As its name sug­gests, it is a set of hol­low wooden dolls ar­ranged from small to large, with each larger doll nest­ing a smaller one. No dif­fer­ent to these dolls, dif­fer­ent in­vest­ment prod­ucts also fit into each other, and al­though their pack­ag­ing may look very at­trac­tive, in most cases there are costs at­tached to each of those in­di­vid­ual lay­ers. In other words, the more “dolls”, the less your re­turns.

This is one of the rea­sons why you need to be sure that you have cho­sen the right prod­uct when the time comes. A Linked In­vest­ment Ser­vices Provider (LISP) func­tions a lot like the Ma­tryoshka nest­ing dolls. It of­fers ac­cess to a range of in­vest­ment prod­ucts and funds kept un­der one roof.

Be­fore LISPs, if you wanted to in­vest your cap­i­tal in Al­lan Gray, Coro­na­tion and PSG’s funds, for ex­am­ple, you had to make three sep­a­rate pay­ments to each of those funds. If you de­cided three years later that you would like to ex­change Al­lan Gray and Coro­na­tion for In­vestec and Pru­den­tial funds, you first had to with­draw all your cap­i­tal from Al­lan Gray and Coro­na­tion and then re­de­posit it in your In­vestec and Pru­den­tial funds of choice.

The in­tro­duc­tion of LISPs re­ally sim­pli­fied this process. By in­vest­ing your cap­i­tal in a LISP, you can di­vide your cap­i­tal be­tween funds from dif­fer­ent providers, all in one place. Even ad­just­ments are made easy – by com­plet­ing one form, you can re­bal­ance your en­tire port­fo­lio. You can also in­vest in an ar­ray of prod­ucts, like in­vest­ment plans, re­tire­ment an­nu­ities, en­dow­ments, preser­va­tion funds and liv­ing an­nu­ities by mak­ing use of a sin­gle LISP, in the funds of your choice.

Al­though LISPs have be­come cheaper and more uni­form over the years, do­ing your home­work prop­erly re­mains ex­tremely im­por­tant when at­tempt­ing to se­lect the right one. Fees vary at dif­fer­ent in­vest­ment sizes for the var­i­ous plat­forms – so do not as­sume it is a “one­size-fits-all” choice.

We de­cided to re­view the stan­dard fees levied on in­vest­ment plans (ex­ter­nal funds) on dif­fer­ent in­vest­ment amounts from dif­fer­ent LISPs (as pub­lished on most provider web­sites) and we learnt the fol­low­ing:

1. The pub­lished fees are not nec­es­sar­ily the fees you pay. You may ac­tu­ally end up pay­ing less, de­pend­ing on sev­eral fac­tors.

2. LISP A may have a lower an­nual fee struc­ture than LISP B, but if the same un­der­ly­ing in­vest­ments have a higher an­nual fee class on the one than on the other plat­form, you may end up pay­ing a higher fee if you only fo­cus on the fee of the LISP.

3. There is not nec­es­sar­ily a link be­tween the num­ber of funds avail­able on a par­tic­u­lar LISP and the plat­form costs.

A part of a per­cent­age point here or there may not sound like a lot, but that is not nec­es­sar­ily the case – be­cause fore­gone re­turns com­pound over time.

As men­tioned, the fig­ures may not be com­pletely ac­cu­rate as ac­tual ex­pe­ri­ences can vary. But it does show that each in­vestor should take care to un­der­stand what will ap­ply in their spe­cific case. This caveat ap­plies equally to large in­vestors, be­cause the fee struc­ture across LISPs vary at higher lev­els too.

Over time, a dif­fer­ence in fees amount to dif­fer­ent re­turns earned and the out­come can im­pact on your bot­tom line – as the ta­ble shows. That said, there def­i­nitely is a lot more to choos­ing the right in­vest­ment on the right plat­form, and costs alone should not dic­tate your de­ci­sion. LISPs of­fer other ben­e­fits too and, when all is said and done, you must be com­pletely com­fort­able with your provider and sat­is­fied with the ser­vice they pro­vide. You may well be­lieve a part of a per­cent­age point is worth it to you if it buys you a bet­ter ex­pe­ri­ence and more choice down the line.

The point is that when you choose to place your dolls in­side one an­other, you should un­der­stand what the to­tal cost pic­ture is, and how it is likely to in­flu­ence your to­tal in­vest­ment re­turn in the end.

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