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.
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.