SIMON BROWN: Do a ‘feesability’ check

In 2004 Rob Rusconi exposed the impact of fee structures on retirement annuities, with some of the higher fees eating away a third of returns for investors.

Since then there has been a war on fees locally, helped further by unit trusts coming into direct competition from the much cheaper passive ETFs.

By 2007, when I was working at South Africa’s largest stock broker, we were dropping fees every year. Not only transaction fees but also monthly admin fees. Then EasyEquities came along in 2014 with no minimums and a transaction fee for private clients almost in line with institutional rates.

Later Satrix dropped its fee on its Top 40 ETF to 0.1% and in response we saw few unit trusts charging more than 1.5% and many hedge funds dropping the 2% annual fee and 20% performance fee.

Lower fees had won.

But recently there’s been a reversal of low fees, with EasyEquities, Sygnia and Old Mutual, among others, all introducing new fees. Mostly monthly admin or platform fees, but a new fee nonetheless, which we as consumers have to pay.

The problem is that working out what fee we’re really paying is tricky.

With a stockbroker it’s relatively easy. You have a transaction fee, maybe with a minimum, admin or platform fee and the mandatory fees and taxes such as securities transfer tax of 0.25% when buying shares and then also Strate and the FSB investor protection levy.

But it is the fund fees that are often still murky.

Transaction costs, platform fees, adviser fees, fund fees … the list goes on. What about total expense ratio vs total investment cost? The latter includes transaction costs.

These fees hurt us because they’re essentially compounded out of our portfolio as we pay them. The stats are simple: higher fees reduce our returns, so a fund that returns, say, 7% in a 3% inflation world means we have a real return of 4%. Nice, but then if we pay a 2% fee suddenly our real return is halved.

Now, sure, I accept that we have to pay fees. There are no free lunches for investors (except diversification, but that’s another story). However, lower fees are always better for the investor as it means better returns.

So how do you determine your actual all-inclusive fee? Just e-mailing a service provider gets you a jumble of fees, sliding scales and options.

There is, however, an easy way to cut through all the fee mess. The effective annual cost (EAC). This was introduced by the Association for Savings & Investment South Africa to help investors compare total charges across financial products and was introduced in 2016.

So if you’re trying to figure out what fee you are really paying, ask for the EAC and this will include everything: fund and transaction fees, adviser and platform or admin fees. Everything all in one nice number and the reality remains, lower is still better.