How to Determine the Costs of Your Investments

If you’re interested in how much you are paying in costs on your investments, there are various measures used by providers. You need to know how these measures differ.

Costs are layered, depending on the type of product and whether you invest directly or via a linked-investment service provider (Lisp) platform. On top of investment and platform fees, there are advice fees, which should be negotiated with your adviser, but may be built into the fee structure as a default option.

Two measures, the Total Expense Ratio (TER) and Total Investment Charge (TIC), apply to collective investment schemes such as unit trust funds and exchange traded funds. These don’t include advice or platform fees. A third measure, the Effective Annual Cost (EAC), is the most comprehensive of the three, applying to all retail investment products, including investments in wrappers, such as endowment policies and retirement annuities (RAs).

All costs are expressed as an annual percentage of assets under management.

Total Expense Ratio

This is an internationally accepted cost measure for investment funds. It is the ratio of the fund’s operating expenses divided by its assets, annualised over rolling three-year periods. Operating expenses consist of the investment management fee, taxes, bank charges, custodian and trustee fees, legal fees and auditor fees. The management fee may be further broken down into the manager’s service fee, which may include a performance fee if the fund outperforms its benchmark, and fund administration costs.

Generally, the more actively managed the fund, the higher the TER, to cover the research and analysis behind investment decisions. Passively managed funds, on the other hand, where the holdings replicate an index and which don’t need expensive teams of financial analysts, have relatively low TERs.

Total Investment Charge

The TIC of a fund is its TER plus its Transaction Cost (TC). The TC includes charges of a one-off nature, including brokerage fees, securities transfer tax, investor protection levy, exchange rate costs, bond spread costs and fees associated with derivative instruments.

The fund fact sheet, known more formally as its Minimum Disclosure Document (MDD), must disclose the fund’s TER, TC and TIC.

Reported performance figures reflect a fund’s Net Asset Value (NAV), which means they are net of costs. In other words, if a fund reports annual NAV performance of 10% and its TIC is 3%, its performance before costs is 13%.

Effective Annual Cost

The EAC, introduced in 2016 by the Association for Savings and Investment South Africa (Asisa) to help consumers compare products across providers, is especially relevant when comparing products with multiple layers.

Under the EAC standard, providers must ensure that values used in the calculations are accurate and comprehensive and that they don’t make a product appear cheaper than it is.

Providers must also disclose full details of any rebates between the provider and intermediary, and whether they are passed on to you. If such a rebate is passed on to you, the impact must be included in the EAC calculations.

The costs must be categorised as follows:

•  Investment management: charges for the management of underlying investment portfolios;

•  Advice: initial and annual advice fees, for both lump-sum and recurring-contribution investments (these should be open to negotiation with your adviser);

•  Administration: charges relating to administration, including any Lisp platform fee; and

• Other: this includes termination charges, penalties and charges on guarantees, smoothing and risk benefits.

The EAC is the sum of these. They must be shown for terms of one, three and five years, and, where there is a specified term, for that term, or 10 years, or to age 55 for RAs.

Your financial adviser must be able to explain the EACs of the products he or she advises on and be able to answer your cost-related questions.

/ends (625 words)

SOURCES:

https://www.investopedia.com/terms/t/ter.asp

https://www.investopedia.com/terms/m/managementfee.asp

https://www.masthead.co.za/wp-content/uploads/2016/09/ASISA-EAC-Standard-highlighted-changes.pdf

www.oldmutualinvest.com/v3/assets/bltdd392fd32dda3ce8/blta316624c79690d19/67bf4d2742a906bb666f3635/ter.pdf