Before we tackle the effect fees can have on the returns of your RA investment (and what you can do to prevent it), let’s get acquainted with the types of fees you may encounter when scrutinising your statements.
Financial advisor fees
There are various ways in which a financial advisor can charge for providing investment advice. Fees can be charged on a consultation or ongoing basis, at an hourly rate or as a percentage of the value of the investment they advised on. You may negotiate with your advisor on these fees. Financial advisors can also earn a commission from the financial product provider. In this instance, their commission is recovered from your contribution. This can be upfront, ongoing or both
Administration fees pay for documenting your contributions, investment returns and payments. You either pay a percentage of your contributions or a fixed rand amount.
Investment costs (also known as asset management fees, fund management fees, investment platform fees )
This fee category is charged as a percentage of the amount you have invested (known as the assets under management fee) and covers operational costs. Performance fees also belong to this group and apply when the investment outperforms its benchmark. With performance fees, there’s a base fee and a fee for returns earned above a specified level – the fee could either be uncapped or capped.
Total Expense Ratio fees
Total Expense Ratio (TER) is based on the costs involved in managing an investment fund, including bank charges, audit fees, taxes, custodian fees (a service where the financial institution protects your assets by holding securities on your behalf). Asset management fees also fall under the TER umbrella.
TER fees are deducted from the value of the portfolio and, as a result, have an impact on fund performance. TER fees need to be displayed on every fund fact sheet – this is required by law.
Total Investment Cost (TIC)
Total Investment Cost is made up of TER fees plus trading cost (TC) fees. Trading cost fees include the buying and selling of shares, bonds and other securities. It also includes brokerage, security transfer tax (a SARS levy on every transfer of a security) and investor protection levies (a JSE levy applicable to all JSE trades).
Penalties are not entirely part of the day-to-day fee structure of an RA, but it’s still important to be aware of the penalties that apply when you want to make your RA paid up or move it.
If you want to cancel your life-assurance RA or move it to a different product provider, you’ll be subjected to hefty fines. The reason is simple – the broker earns a decent upfront commission upon selling the policy to you, and this commision is basically borrowed from your future contributions over the period stipulated in the contract.
Another acronym (but for the better).
The Effective Annual Cost (EAC) sets out to provide a standard disclosure of fees. This allows you to compare the impact of fees across financial products.
The following components are used to determine the EAC:
- Investment management charges
- Advice charges
- Administration charges
- Other charges (ex. Termination and penalty charges)
Why is this important?
For every 1% you spend less on fees from the onset, you can increase your final pension by approximately 30%.
In our next blog we’ll take a closer look at the impact of fees on your retirement savings and what you can do to prevent it.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.