When investing their hard-earned money, investors face a range of fees. These include financial adviser fees for financial advice and investment support, investment management fees for investment management and administration or platform fees when investing via a fund platform or linked investment services provider (LISP).
Few investors truly appreciate the significant impact of seemingly minor and recurring charges on the performance of their investments, and how these negatively influence their ‘after-cost’ return.
The reason is quite simple: the costs involved in an investment are often evaluated using Total Expense Ratios (TERs), expressed as a percentage. A TER of 2% or 4% doesn’t sound unreasonable, particularly since these fees are quietly slipping away in small amounts each month, and returns are quoted after the deduction of fees.
“Understanding the impact of these fees is easier if the costs are expressed in hard, cold rand terms instead of percentages.”
“For example, if you invest R1 million in a unit trust for 20 years at an annualised return of 10%, and the TER is 1%, the return would be just over R5.5 million. At a TER of 2%, the return is less than R4.5 million.”
If the TER goes up to 3%, he says the return drops another million to around R3.6 million, while at a TER of 4%, the return is not even R3 million. It means, effectively, that if you are paying a TER of 2%, the impact of the fees charged over 20 years cost you a whopping R1 million, while a TER of 3% costs you R2 million and a TER of 4%, a fortune of R2.5 million.
Experts agree that investors should not pay more than 1.5% to 2% in total, as it becomes progressively more difficult to absorb higher fees over time.
In absolute terms, a TER below 1% is low, and a TER of between 1% and 2% is ‘acceptable’. A TER above 2% would require the investment manager to produce significant excess return to absorb the fees.
According to National Treasury, the South African retirement fund industry appears to be expensive, with research showing that if charges were reduced from 3.5% to 0.5% a year, pension fund contributors could receive double the benefits that are being accrued from their current contributions.
“Given the complexity of investment vehicles and markets, and the limited investment knowledge of most ordinary South African investors, many simply believe that investment fees are a non-negotiable reality of life, despite the sometimes devastating effect on their investment returns.”
“However, the reality is that there are simple, straightforward investments that do not require specialised advice, or any adviser, investment manager or platform fees, and, not surprisingly, the returns generated reflect the absence of these fees.”
Case in point is buy-to-let property investment, and many investors are surprised to discover just how simple buy-to-let property investment is.
“Far removed from the crippling fees, the jargon and the complexity of traditional investments, buy-to-let property investment is a simple, straightforward and proven way to secure an inflation-linked annuity income for life, and to ensure your capital grows.”
“You do not need prior knowledge or qualifications, nor do you need much time or effort to implement this system. And you certainly don’t need to sacrifice returns to pay adviser, investment manager or platform fees.”
All that is required is the willingness to investigate the alternative of a direct investment in an income-producing property, which is used by the world’s wealthiest people and institutions, and is within the ability of salary-earning South African investors to investigate and implement.