What EAC standard requires

The effective annual cost (EAC) standard developed by the Association for Savings & Investment SA (Asisa) requires product providers to disclose the costs of investment products in four separate categories of charges (including VAT) and over at least four periods.

The EAC is expressed as an annual percentage of your investment.

The EAC calculations must assume that you will terminate your investment at the end of each specific time period. So if your investment has a penalty that will be applied, or a loyalty bonus you will lose if you stop paying premiums or contributions, this must be shown as a cost.

The product provider must give you EAC information relevant for one, three and five years, and where there is a specified term, for that term, or 10 years if no investment term is set, or to age 55 for retirement products such as retirement annuities.

The four cost disclosures that must be shown are:

◆ Investment management charges. All costs and charges must be shown. These include the charges of any wrap product, such as a fund of funds, and those of the underlying funds as well things such as stock broker charges and VAT.

◆ Advice charges. If the product company pays commissions or fees to your financial adviser on your behalf, these fees must all be disclosed. This includes all initial and annual fees on both lump-sum and recurring-premium products.

◆ Administration charges. All charges relating to the administration of the product must be disclosed.

◆ Other charges. This is a catchall for all remaining charges, such as termination charges, penalties, loyalty bonuses, guarantees, smoothing or risk benefits, and charges for risk benefits such as a premium-waiver benefit. These “other charges” must all be explained in notes published directly under the EAC table of costs.

Each of the four components must be calculated and disclosed separately and then totalled to provide one EAC figure for the financial product, expressed as a percentage of your investment (see example above).

The EAC standard sets down how each element must be calculated and what assumptions may or may not be used.