The FIRE movement is obsessed with fees, with good reason. These goblins persistently nibble away at your portfolio’s performance and the difference between paying 2% per year instead of 0.5% in an otherwise identical investment means you’ll take a whole two years longer to treble your investment amount.
For the record, despite being insidious performance slayers, fees are not the number one driver of disappointing net returns. Asset allocation – whether you’re in equity, property or interest-bearing assets. Also, which geography you’re invested in can cause the biggest gap between investor A and B’s returns. For example, if A is invested in a share index over 20 years and B in cash over that same period. And if you’re a high-income earner, being in the right tax wrapper is probably your second most important driver of strong net of tax returns. The fourth factor, fund manager skill, may or may not contribute positively to your returns.
Still, fees need to be hunted down, no matter how deep they’re hiding, and exterminated if they’re for a service that adds no value to your life. In Untangle the knotted web of investment terms, you met all the layers your money moves through when you hand it over to the investment industry. You’re absolutely right if you thought: so many places fees can hide!
So, how do you find out how much you’re really paying? In total. On everything.
To its credit, the industry has made some progress in terms of transparency and the more client-friendly businesses actually point out to investors that they need to look out for three categories of fees. They are what my colleague Richard calls the three A’s of investment fees:
- Asset management.
With these three categories in mind, I’ve taken the layers diagram from Untangle the knotted web of investment terms and added the advice level, so we can be sure we’re searching your investment’s coat pockets for all fees.
Let’s tackle the categories one by one.
1 Adviser fee
Nowadays, most investment companies are set up to deal with investors directly. So, technically, you don’t need to use an adviser – if you’re willing to do a fair amount of research yourself, speak to different people who have been in the game a long time, and you can handle the different and often conflicting opinions that come your way. You’re bound to come across some strong opinions, firmly held. But those who give the best advice are those who have strong opinions, loosely held. Therefore seek out advice from those who are constantly monitoring the investment landscape and who sometimes doubt themselves, for they are more likely to have considered the multiple possible avenues of investing.
I recommend using a financial adviser or tax specialist when:
- You don’t have the time or desire to research the different options available
- You need someone to monitor you in case you do something incredibly destructive like cashing in a long-term investment within a year or two of investing because it’s giving you less than the interest rate your bank offers you
- You’re only a few years away from retirement and need to know which tax and retirement structure would be optimal
- You’re about to retire and need to find out how much of your one-third cash allowance you should actually take in cash – to minimise your tax
- You need to set up a testamentary trust for minors
- You earn offshore income or have offshore investments and need a cross-jurisdiction view
- You have generally complicated tax affairs
Some of the best advisers charge per hour. Or they’re open to either an hourly rate up-front or an ongoing annual fee. Get a quote and then do the calcs to figure out whether up-front or ongoing will probably work out better for you. Normally, an hourly fee works out better for people with large amounts to invest. For small amounts an annual fee may work out cheaper. Between 0.5% and 1% per year is standard for the annual fee model. If you have more than a million to invest, you should be able to negotiate the 0.5% deal with your adviser.
With the annual fee model, you should get a call every year from your adviser checking in on you and updating you on your investment. If your adviser goes silent on you or, worse, doesn’t answer your calls, you have every right to cancel the annual adviser fee. A friend of mine whose adviser uses the Allan Gray platform never informed her about the launch of tax-free saving accounts on the platform and she was unnecessarily paying the 20% dividends tax because she was still in the normal, taxable unit trust (not ‘wrapped’ in a tax-free savings account). After several no-replies to her queries around tax-free, she asked Allan Gray to remove him as her adviser. The annual adviser fee was cancelled.
2 Admin fee
A platform gives you access to either of the two most popular collective investment schemes available in SA, a unit trust fund or an exchange-traded fund (ETF). The admin or platform fee is what you pay for the pricing of your investment, the handling of transactions, the annual tax certificates, your digital interface with your investment and other communication, as well as the right to view and buy ETFs or unit trusts from various product providers on one platform. It’s like using AirBnB instead of dealing with the host of the holiday accommodation directly.
Important distinction: Admin/platform fees could be either annual or charged per transaction. For long-term investors, pay-per-transaction is almost always cheaper than an annual fee. For example, if you’re paying away 0.5% of the value of your investment when investing and again 0.5% when you cash it in five years down the line that beats paying 0.5% every year over those five years…