High fees erode your in­vest­ments

New mid­dle­men mean to­day’s in­vestors are pay­ing more fees than pre­vi­ous gen­er­a­tions

Mail & Guardian - - Business - Thalia Holmes

They say that too many cooks spoil the broth. But what do too many mid­dle­men do? In the in­vest­ment value chain, they raise the fees. Twenty years ago, an in­vestor or trust com­pany would have paid a few straight­for­ward fees with their in­vest­ment. They might have paid a fi­nan­cial ad­viser or in­vest­ment con­sul­tant but that would have in­volved ei­ther a once-off fee or a con­tri­bu­tion-based com­mis­sion of be­tween 3% and 5%. Nowa­days, the fees have pro­lif­er­ated into an ar­ray of ex­tra costs hid­den in the fine print of your agree­ment.

Plat­form fees now ap­ply. Dis­cre­tionary fund man­agers also take their cut of the money, usu­ally as an “as­sets un­der man­age­ment” fee. And many fi­nan­cial ad­vis­ers now charge some­thing known as a “trail fee”. It’s a so-called an­nual “ad­vice” fee that is taken not as a per­cent­age of your pre­mium but as a per­cent­age of your to­tal ac­cu­mu­lated fund ev­ery month. (See “What are all the de­duc­tions?”)

Asief Mo­hamed, chief in­vest­ment of Aeon As­set Man­age­ment, re­cently con­ducted some “back of the en­ve­lope” cal­cu­la­tions to show the ef­fect of new “helpers” in the in­vest­ment value chain such as dis­cre­tionary fund man­agers, in­de­pen­dent fi­nan­cial ad­vis­ers and plat­form fees into the in­vest­ment value chain. His es­ti­mate is eye-open­ing: these ex­tra charges re­duce the es­ti­mated an­nual re­turn of in­vest­ment by at least onethird a year, he says.

Mo­hamed writes: “On the op­ti­mistic as­sump­tion that the gross re­turn of, say, a mul­ti­as­set port­fo­lio re­turns in­fla­tion plus 5% over a 10-year to 50-year pe­riod, the direct fees of these ‘helpers’ will re­duce the es­ti­mated an­nual re­turn of 10% (con­sumer price in­dex + 5%) by 35% to 45% per an­num. This is not sus­tain­able.”

Speak­ing to the Mail & Guardian, Mo­hamed said his cal­cu­la­tions “il­lus­trate the point that all the helpers in the value chain are erod­ing the re­turns on av­er­age by about 30%.

“It’s de­vel­oped in hav­ing more helpers in the chain,” he con­tin­ued. “Be­fore, let’s say, 10, 20 years ago, the trust com­pany [over­see­ing a pen­sion fund] might have had a fi­nan­cial ad­viser, and the fi­nan­cial ad­viser would have taken a fee of, say, 3%. But they would have taken no trail fee of, say, 0.5%.”

Si­mon Brown, founder of Just One Lap, points out that, as in­fla­tion de­creases, so the in­vestor is harder hit by the ex­tra fees. “One client has gone from 5% above in­fla­tion to only 1.5% above in­fla­tion. In other words, their wealth has been dec­i­mated,” says Brown. “This is a very im­por­tant point. In the days of higher av­er­age in­fla­tion, say 9%, the fees may have seemed less bad but now with lower in­fla­tion and growth the fees are killing re­turns.”

And lower in­fla­tion isn’t the only thing that puts to­day’s in­vestors in a worse po­si­tion than those in pre­vi­ous gen­er­a­tions. The plat­form fee is an­other mod­ern woe that takes its toll.

“It wasn’t there be­fore; it’s a new in­no­va­tion,” says Mo­hamed. “It cre­ates some sort of value in the sense that it ag­gre­gates funds on to one plat­form. The ques­tion is whether they re­duce the as­set man­age­ment fees to make up for it.”

At the time of go­ing to print, the As­so­ci­a­tion for Sav­ings and In­vest­ment As­so­ci­a­tion was un­able to re­spond to a query about whether it is stan­dard prac­tice for as­set man­agers that use plat­forms to de­crease other fees com­men­su­rately.

Brown says that “plat­form fees re­ally are a scam”. He is es­pe­cially dis­parag­ing about those plat­forms that charge a fee for a per­cent­age of as­sets man­aged. “They should charge a flat fee,” he ar­gues. “It costs no more to man­age R1000 ver­sus R1-mil­lion on a plat­form. They’re all just jour­nal en­tries with a dif­fer­ent num­ber of ze­roes.”

But Shaun Duddy, an ac­tu­ar­ial an­a­lyst at Al­lan Gray, ar­gues that some fees are worth pay­ing. “It is im­por­tant to con­sider the over­all value-for-money that you get for any given in­vest­ment, rather than fo­cus­ing ex­clu­sively on the fees you pay,” he told the Mail & Guardian in a June in­ter­view.

“The best way for in­vestors to com­pare op­tions is the long-term, af­ter­fee re­turns that they can ex­pect from dif­fer­ent op­tions.”

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