A few weeks ago I attended a 10X event in Johannesburg. Being a low-cost retirement annuity (RA) provider, obviously much of the discussion centred around fees. Steven Nathan, who runs 10X, did an analysis of a statement sent by an old-school retirement product provider. He used the real example to illustrate how impossible it can be to figure out what we’re actually paying for our investments.
Listener Jenny Pigeon (a nom de plume, if you will) had the same experience this month. She’s been investing with Allan Gray for 16 years but never thought to check her fees until she discovered The Fat Wallet Show.
She sent her statements on to me, hoping I could help her figure them out. Since I’m of the new school (0% platform fee, 0.25% brokerage, 0.1% TER), I couldn’t. Simon had brushed up against these sort of products and still has an Allan Gray product. He couldn’t do it either.
It took two weeks before Jenny, Simon and I got to some sort of answer, which wasn’t too bad, actually. In this episode we talk about the process, why successful investing means you’ll inevitably pay more than you contribute and how little we like the percentage of assets business model.
We also decided to include my preparation notes to try to make the topics more searchable. It’s not as great a solution as a transcription. However, it’s a free solution. And some (us, mostly) would say that’s the best solution.
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Christoff Gouws sent a link about the P/E Ratio of the S&P 500. http://www.multpl.com/shiller-pe/
It is a great way to guage the “value” within the whole S&P500 (for example when planning on buying some more ETFs tracking this index). As you know, when evaluating single stocks, any P/E ratio above 20 is considered “overvalued” or “expensive”. To this, an interesting thought is the current “overvalued price” of the whole S&P500, since the Shiller P/E Ratio currently stands at 32.38! More market-correction (as was seen in the last few weeks) is needed I guess!
Win of the week:
Me, for figuring out this thing about total return ETFs.
A total return ETF reinvests dividends instead of paying them out to you. The idea is that you save on the brokerage, because there’s no charge. This only works if you want to use your dividends to buy the same ETF.
However, you do get taxed on the dividends before they’re reinvested.
What I learned:
Once you get taxed, they don’t actually buy more ETF units. They simply add the value of the dividends to the NAV of the ETF. When you sell the ETF at a profit, your CGT is calculated based on the sell price minus the buy price. But your sell price now includes dividends you already paid tax on.
We need a spreadsheet ninja to work out when your CGT becomes more than your brokerage. We also need to work out if this applies to bond ETFs.
I also wanted to send a shout-out to Warren. He says:
Today is both a happy and a sad day. Happy/ relieved that I have FINALLY finished listening to ALL the fat wallet show podcasts, including all bonus episodes, Christmas and the like and a sad day as now I have to wait for the new ones to come out (I don’t even know when these are released as I would download them as I go, on free office WiFi of course).
I would just like to say thank you both for putting this together. I am a 26yr old Investment Analyst (so not as cool as your engineer or doctor friends haha) and currently also studying towards my CFA charter. Its refreshing listening to this podcast as its takes all the complicated things I deal with on a daily basis and states them in a nicer simpler way. The links to the IG and other webinars are also great.
We inspired Jenny Pigeon to confront her investment fees for the first time.
I am in my early 60’s and would like to retire fairly soon. I am self-employed and instead of taking out a retirement annuity I have “paid my self first” and paid regularly into Allan Gray.
Since my new addiction of listening to you and Simon on The Fat Wallet Show, I have decided, for the first time ever, to read my Allan Gray Quarterly Statement.
There are about 20+ different funds on my platform. I have asked Allan Gray to send me the total fees for the quarter in rands, as I find the maths a bit complicated with so many different funds with different fees.
My fear is that my annual contribution (R240,000) could in fact be less than my annual management fees.
I would love to make significant changes to reduce costs and therefore improve my investment performance.
She does have another problem. She’s become friends with her advisor, so I want to try to help her understand and simplify her fees without burning bridges.
She sent a statement. And then some more statements with the rand amount for the period. Then there was a Twitter storm. In the end, I managed to work out:
She pays more in fees than their monthly contribution of R20,000. Based on the latest info, fee is 0.78%.
Paying more than your contribution in fees isn’t impossible. If you contributed R1500 to an ETF and ended up with R1m, at a TER of 0.15% your contribution would match your fees.
In one account she’s invested in nearly 30 different funds, including one that “reduced the minimum fee from 0.70% to 0.60%, the maximum fee from 2.10% to 2.00% and the fee at benchmark from 0.85% to 0.75%.”
Only 8 have an investment management fee under 1%. 11 have investment management fees over 1.5%. Average investment management fee cost over funds, 1.5%. Excludes platform admin of 0.23%.
This fee excludes Annual Administration Fees, Annual Financial adviser fees and
Initial financial adviser fees.
She also has a second account, which includes five more Allan Gray funds – some of them feeder funds, some UTs. The investment management fee for all of those comes to 1.98%.
“Some annual administration fees are deducted within the unit trust and are included in the investment management fee.”
Some feedback that I got from Twitter.
Let’s start with, when was the investment made or moved to the AG LISP? Looks like you are trying to stir up some attention here. ????
- She set up the fund in the early 2000s.
Doesn’t sound right…Allan Gray caps the annual fee at 1%. An initial fee can only be charged once.
- All the statements she sent included an initial advisor fee as well as an annual advisor fee
Passive? Which index is the UT tracking?
- Turns out, she has some passive like the Satrix ALSI and the MSCI World, but in the smaller account all of her funds are actively managed.
Two people said the advisor is the one to blame:
More of an advisor problem than AG. You can get Nedgroup Core Diversified and Core accelerated trackers for a exactly 1 percent (inclusive) on AGs platform.
This is a function of the advisor screwing the client. Important not to bad mouth the platform, active management or underlying funds.
Georgie wants to save on bond insurance.
18 months ago I took out a home loan for R1 million.
I managed to pay off R400 000 in the first year.
Now I am paying the remaining R600 000 in monthly instalments, with no adjustments to the interest.
To qualify for the home loan, I was required to take out full bond insurance.
I’m paying a monthly amount of just under R500 to insure the R1m bond, only 60% of which I would actually use if the situation arose that I was unable to pay.
I have asked the bank for my “principal amount” of R1m to be re-evaluated, with no joy, just a convoluted answer about having to take out another home loan, which I would then need another Offer To Purchase for, which seems ridiculous.
How can I work this situation so that I’m not overpaying for home loan interest and insurance?
Madelyne says we’re wrong about the Satrix 0.1% TER.
Currently on etfsa, it is listed at 0.31%.
That makes the Ashburton top 40 with a TER of 0.16% more attractive.
Wealth needs help making choices about their tax-free account.
I have previously invested in the tax-free Allan Gray balanced fund, and although it is a good fund the fees are far too high (TER of higher than 1%).
I am glad I can move from this year, but I am not sure what to take and what to do with the new allowance.
I like the ETF options as discussed in you one ETF to rule them all show but are looking at REITs as well.
Reason being that the dividends from REITs are taxed as normal income outside of a TFSA. This makes the TFSA a bit of a hack for a good future passive income in retirement.
I am just not sure what good options there are, I know ABSA’s property equity fund is very good but again fees are a stumble.
Edwin wants to diversify his property portfolio.
I have three investment properties and would like to diversify my wealth.
Two of these are paid up and the last one will be in about two years’ time.
Is there a way I can use my paid up properties to get a lump sum of cash that I can use to put into ETFs without selling the properties? The rentals already go towards paying off the 3rd property. I’m trying to diversify by stealth.
Lawrence says we’ve been giving him sleepless nights following our single ETF strategy show.
He has some shorter-term objectives in his TFSA, but thinks that he can afford to be slightly more risk tolerant. He’s thinking about:
a combination of 2 ETFs – one high risk with the majority of my holding per year and one low risk for when I reach a level I feel I should sell out and trade into the more stable ETF.
An example could be something with high exposure into Emerging Market or a Resource ETF and a Top 40 ETF as a combo.
Normal ETF Account
Then on my normal ETF profile, just to keep it plain and simple with something to keep putting money into over time and not looking for any special returns.
Mbasa wants to know if RAs and provident funds can really be counted towards your net worth.
On disposal of ETFs and Unit Trusts, do you pay CGT?
Colin’s friend is being threatened with fees.
I sent a copy of this week’s newsletter to a mate who seems to be stuck with a ‘policy’
He replied to me that he cannot cancel the policy until he is 55 and that the broker has threatened to charge all admin fees until the end of the policy. Or words to that effect.
Is this type of stuff legal, and who is the best person to give some advice?
Shaunton wants an RA without an advisor.
Simon mentioned that he has an RA that don’t have any financial adviser involved?
What is a good platform that one can use to invest in your RA without using financial advisers?
What is good DIY RA options to investigate, which products to use?
Nehal took his TFSA situation into his own hands like a boss.
It took just one secure message while on the share trading platform and they moved my portfolio from the internet banking site with a R10 monthly fee to the share trading platform at zero monthly or annual fee and just the trading fee.
However since we can now transfer or TFSAs can you please make a mini podcast just with what Simon said about ABSA being the cheapest and that we can now transfer.
The Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to firstname.lastname@example.org.
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