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Picture: 123RF/GUSTAVO FRAZAO
Picture: 123RF/GUSTAVO FRAZAO

I have a retirement annuity (RA) with XYZ on the Ninety One platform. It comprises XYZ balanced fund (56%), XYZ cautious fund (34%) and XYZ global fund (9%). The effective annual cost is about 2.67% per year and the total invested is currently R575,000. Please advise if I should consider transferring to another provider and could you provide me with some suitable options? I’m unhappy with the fees.

— Reader name withheld 

Answer: 

The reader raises an important consideration when it comes to investing: costs. However, there are other issues that should be considered. These include the role of the product provider (platform), the importance of asset allocation and the risks of  focusing solely on any one issue.

The reader’s main concern is cost, so we will deal with that first. A fee of 2.67% per year for investment management is expensive. The client will have to pay fees for advice and administration on top of this and could easily be paying closer to 3.8% per year in total. In a low-return environment, the effect of these fees can be damaging to the client’s net return. The average total investment cost is about 1.8% per year and the reader is paying a lot more than that.

When it comes to mitigating costs, the client does not necessarily need to change product providers. They can remain at Ninety One but switch into a portfolio of cheaper funds if cost mitigation is the sole objective. We drew a quote from Ninety One comprising a portfolio of passive (index-tracking) funds. The cost for investment management came in at 0.55% including VAT. This is significantly cheaper than the current fee structure. It means the reader can achieve lower costs while remaining on the platform, which will save them the significant administrative burden associated with moving to another RA provider.

But while the reader may save on fees by moving from active funds to passive funds, they could run into other challenges.

First, there are a plethora of indices that they can track, and the return differences can be significant. For example, the all share index has returned 13.2% for the year ended March 2022, while the shareholder weighted index return is 9.1% and the dividend plus index is up 22%. These are general equity indices. The challenge increases significantly when choosing offshore indices to track.

Second, the investor is taking on the key challenge of asset allocation, which is the ultimate driver of return over the long term. There are many skilled asset allocators who have delivered strong returns net of fees. So the reader could invest in a combination of passive and active funds on the incumbent platform and mitigate both cost and investment risk.

The reader is correct to raise concerns around the issue of costs, but they should be careful not to run into other issues by only focusing on that issue. One option could be to consult with an independent adviser, preferably an experienced and qualified certified financial planner (CFP) who could provide such advice on a fee basis and not for commission or any other incentive.

— Craig Gradidge, CFP, co-founder of Gradidge Mahura Investments

Send us your questions to yourmoney@fm.co.za

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