Picture: 123RF/PHONLAWAT CHAICHEEVINLIKIT
Picture: 123RF/PHONLAWAT CHAICHEEVINLIKIT

Q: I recently looked at my retirement annuity and admit that I am relatively clueless on the matter. I’m trying to improve my financial literacy by reading books and articles, and listening to podcasts and so on. I read your September 2019 article on the costs of retirement annuity funds.

I started with my current fund in December 2017  — it was selected by my financial adviser and I’m currently contributing R10,000. I have looked at the effective annual cost (EAC) though and see that over the term, the cost would be 3.3%, which is on the higher side, according to the article. More worrying is that the cost in the first year is 10.5% and 4% after year five. I will speak to my financial adviser about this but wanted some advice from another source. Is it normal for the fees to be this high in the first five years? — Heinrich, via e-mail

A: Wynand Gouws, certified financial planner and wealth manager at Gradidge Mahura, replies:

It is encouraging to see that you are taking proactive steps in ensuring your financial independence. The jargon in the financial planning industry can sometimes be daunting, so let’s unpack that and the different fees incurred when investing in a retirement annuity or savings plan.

Advice fees cover the cost of the initial advice in setting up and/or restructuring your, the client’s, balance sheet and portfolio. This involves information gathering, analysis, solution formulation and report writing. There is an initial advice fee for these and an ongoing service fee that covers the cost of portfolio reviews, client servicing, record keeping and compliance.

Administration fees cover the cost of administering the investment products, including pricing, statements, tax certificates and compliance. The adviser will select the most suitable administrator in this regard — Allan Gray, Sygnia, Old Mutual and so on.

Asset management fees are paid to the fund managers who are responsible for portfolio construction, portfolio optimisation, risk management, stock research and selection, asset allocation, portfolio monitoring and compliance. Performance disclosed by asset managers is net of asset management fees.

Effective annual cost (EAC) is the combination of the above costs and any “other” costs expressed as an annual percentage. These other costs include bank, auditing  and regulatory fees.

What is the right level of fees for a retirement annuity or savings plan?

  • Asset management fees (investment management fees): For a growth portfolio, an appropriate level would be 1%, which can be achieved by including passive funds.
  • Administration fees: The administration fees for flexible investment products are typically 0.35%-0.50% a year (deducted monthly). 
  • Advice fees: These fees should be disclosed upfront and could be an asset-based fee as explained above, an hourly fee of about R1,495 or a combination of these.

From the information provided, the EAC is expensive, which could be the combination of the high administration fees and high “other” fees. Advice fees and/or commission is sometimes included under “other” fees and included in the footnotes.

Financial planning business models and advice fees do vary. Let’s look at two scenarios:

  • Based on a 1.5% initial advice fee and 0.6% annual advice fee, the effective annual cost will be 5.4% in year one, reducing to 2.8% in year five and 2.44% thereafter.
  • Based on a 0% initial advice fee and 1% annual advice fee, the effective annual cost will be 2.53% in year one reducing to 2.51% in year five and 2.49% thereafter.

The longer the investment term the more important the “thereafter” fee total. While 0% advice is great, the higher annual fee more than compensates for the one-off discount.

• Send your questions to money@arena.africa

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