Leaner times will hit fee vultures

Treasury wants to protect savings — and some market leaders are responding favourably

Investment product fees are too high and can erode up to 60% of your savings. And it’s not just those who are marketing lowfee investment products who say so, it’s the treasury, too. In a 2013 document, the treasury states that recurring fees have a particularly significant effect on retirement benefits and can take off 60% of retirement savings over 40 years of regular saving.

Work to remedy this has continued and, in his mini-budget speech last month, Finance Minister Pravin Gordhan said substantial financial sector reforms are on the way.

The “twin peaks” regulatory reform programme is expected to be finalised by the end of this year and will support inclusive growth in several ways. It will reduce the costs of financial services and make them transparent. “Unduly high costs currently reduce the returns to savers,” Gordhan said, adding that “default regulations” (See “Goodbye to lucrative performance fees”) will also simplify retirement saving options.

Although the regulations may not be in effect yet, some asset managers are forging ahead with simple, lowfee offerings, which can be as low as 0.40% a year compared with an estimated industry average of 2.5%.

“South Africa has very high fees and we have very complex investing environment. The environment is one which is difficult to navigate and financial advisers add to the cost,” said Steven Nathan, the chief executive of 10x Investments.

“We [10x] are trying to simplify the environment and reduce fees. Those two things go hand in hand.”

Nathan said 10x has one investment strategy for all its clients — one balanced portfolio in which clients are managed according to their time horizons.

“A chief investment officer or farmworkers investing with us will have the same portfolio,” Nathan said.

At 10x, retirement annuity fees are 1.03% (including VAT) a year for investments below R1-million and are lower for larger investment amounts. Fees start at the same rate for 10x preservation funds and umbrella funds.

Low-fee offerings are typically “passive” investments that track indexes.

“With active investment management, you buy and sell shares. So you pay brokerage fees, and government collects tax, too. There are a lot of transaction costs involved.

“Passive is a terrible term,” he said. “It implies there is no brain power involved in doing anything.”

Apart from investing in equities, 10x’s balanced portfolio holds listed property, government bonds and cash, he said.

Nathan said the markets are impossible to predict and all that one can do is to invest according to investment principles.

“Everything else is noise. It’s just people trying to make money off your money,” he said. “At 1% or 2%, over years it’s at least 40%, plus the compounded impact. These fees are seemingly small numbers but add up over time,” Nathan said.

“There is a lot you have to do to keep the fees down. But you have to start with a culture of trying to keep fees down. Some asset managers don’t want to do that. They want to beat the market.”

He said investment product fees are high by global standards, according to the Morningstar 2015 Global Fund Investor Experience report, which assesses collective investment scheme industries in 25 countries.

But the Association for Savings and Investment in South Africa (Asisa) has taken strong exception to the findings, noting that the choice of comparisons were selective and, “in our view, they got it wrong in some respects … Our retail investment costs are in line with the average around the world.”

The association raised its concerns with Morningstar in 2011 and 2013, to no avail.

Peter Dempsey, the deputy chief executive of the association, said lowfee offerings are not disrupting the market at this stage.

“The South African market is still quite traditional. And these newer offerings often require internet connectivity and devices that enable that, which not everyone has access to,” he said.

“Active managers are unashamed cheerleaders for active management. And the same is true for passive,” said Dempsey. “There is place for both in a balanced customer portfolio.”

Even for investment products that are not passive, asset managers can charge lower fees but choose not

to, said Magda Wierzycka, the chief executive of Sygnia, which offers a range of low-fee investment products. “To date, no one has managed to offer the man in the street anywhere close to what we are offering in terms of a total fee of 0.40% per annum for a savings product and an investment fund,” she said.

Sygnia’s fees begin at 0.40% a year for an investment into a retirement annuity and a Sygnia unit trust, dubbed a skeleton fund, with 10 to choose from, and range from pure index-tracking to hybrid products. The same applies to Sygnia preservation funds and living annuity investments.

Sygnia is listed on the JSE and manages R158-billion in assets. It started up in 2006 with an aim to disrupt the market.

“There has been collusive behaviour with a few companies dominating that sector with very little competition. The business model is generic. They all offer very similar products, although marketed differently, and everyone charges the same, so there no incentive to disrupt the model,” Wierzycka said. “It’s an industry

which has been very well paid. That money allows them to spend a lot on advertising and to buy the emotional loyalty of consumers.”

Sygnia is essentially a “fintech” company, “hence everything that we do is underpinned by leading-edge, self-developed systems and technologies. That is what gives us both the competitive edge in the market, as well as the efficiencies which can be passed on to the consumer,” she said.

Asisa has developed a new standard measure, known as effective annual cost, that seeks to divide product into four categories — advice, investment management, administration, and other fees — as a way to compare investment product costs better.

Very generally speaking, all four result in fees of between 2% and 3% a year, Dempsey said. If you strip out advice-related costs, it brings the fees down substantially, but Asisa recommends, unless you are really skilled, you should get an adviser to help you.

“Good advisers will put into your portfolio some active, some passive, and smooth out volatility over time,” he said.