Domestic has R500 per month to save

FEES FOCUS: NEED TO KEEP COSTS DOWN OVER THE YEARS Mduduzi Luthuli, head of wealth management at Luthuli Capital, advises a domestic worker who’s considering either active or passive funds.

Question: I am a 50-year-old domestic worker who owns my own home and am debt free. I would like to start investing R500 per month towards a retirement annuity (RA) to supplement the government grant income I will receive when I retire. I received a quote from Sanlam for a Cumulus Echo Retirement Plan that I think has charges of 2.5%.

I'm happy to look at active or passive funds, but want to know which offer the lowest costs in the market.

Answer: According to the Retail Distribution Review, fees must be based on the value one brings to a client. Great financial advice is worth every penny.

We will soon be required to have very frank discussions with our clients and justify the applicable fees charged. Why does one advisor charge an upfront fee of 3% while others charge 0%? The RA market requires competition between service providers. RAs are voluntary membership funds. Most investment-linked RAs provide investment choice to members. Some require their members to take the advice of financial advisors, which raises the costs of membership.

Let’s look at the major factors of cost when designing such a product:

Early surrender penalties marketed as loyalty discounts or refunds on fees;

The extent of member investment choice (greater choice leads to higher charges);

Discounts on standard charges offered to members enrolled on the recommendation of preferred distribution channels;

Complex investment guarantees of various types;

Other policy features, such as free switches of retirement savings from one investment product to another, minimum premium amounts, and the option to make the policy paid-up, at a cost. Fees on most investments are charged as a percentage of the assets. A natural consequence of this is that you’ll pay more as your investment grows.

If your total fee is less than 3% you’re paying in line with the industry average.

Typically we tend to see three types of fees: Administration fees, Investment management fees, and Financial advisor fees. The features of RAs tend to be the same, no matter which service provider you opt for. These features are governed by legislation so no one provider really can create a product that differs largely from what’s available in the market. With Cumulus Echo Retirement Plan, Sanlam aims to give you a bonus on your returns as an incentive for choosing its RA and, more importantly, keeping its RA.

Active vs passive. Which is better? This has been an ongoing debate with no real conclusive answer. Personally I feel both have a role in a portfolio. Active managers attempt to outperform the market by assembling a portfolio that is “superior” to the market.

But the Efficient Market Hypothesis asserts that no investor will consistently beat the market over long periods except by chance.