No doubt you’ve heard of the Financial Intelligence Centre Act (Fica), the one that’s designed to fight financial crime and prevent money laundering (and get your back up, it seems).
“Know Your Client!” it commands financial institutions, not just in the long-practised biblical sense, but also by regularly making copies of ID books and proof of address. Judging by the unchecked corruption in our country this frustrates longstanding customers much more than longstanding villains.
Sadly, there is no law that requires clients to “know” their RA fund. If there was, a lot more people would end up with a lot more money. But most investors don’t get properly acquainted. Instead, they put their trust in brokers, in household names and in the belief that millions of other people can’t be wrong. But, in this case, they often are.
You don’t have to be among them. To get the most out of your RA, take a closer look at what you’ve signed up for, and make sure your two key numbers are right. As a long-term investor, it is these two numbers alone that overwhelmingly determine what your savings will be worth come retirement.
The first is your level of market risk (the percentage of your money invested in the share market). That’s a subject for another day, but you can find out more here.
The second is your fee percentage. That’s it. Every other number is pretty much just noise.
You may already know your asset mix, but do you have any idea what you are paying in fees? If not, it’s time you found out. 10X can help.
Why investment costs matter…
It’s really very simple: over any period, the total available investment return is finite and reduced by any fees. In effect, whatever the financial service industry charges you – for administration, advice, commission, trading, investment management or performance – is at the expense of your return.
Long-term, these costs make a huge difference to your wealth. In the context of a 40-year savings plan, someone paying 3% pa in fees rather than, say, 1%, receives 40% less money at retirement. Jack Bogle, the pioneer of index investing, calls this the “tyranny of compounding costs”.
The majority of RA investors in South Africa pay around 3% pa. That’s the total cost levied by the large insurance companies, made up of around 0.75% for advice, 0.25% for administration and 1.5% for investment management (ex VAT).
Paying those fees means your fund is likely to be making more money off you than for you. This is hardly fair since you are putting up all the capital and taking all the risk. You should be getting the lion’s share of the return.
Often you don’t see all the fees, so it’s no surprise that the industry avoids the subject. Not least because it puts an uncomfortable spotlight on the subject of “value for money”.
Why, for example, incur high active management fees if most managers don’t beat the average market return that can be had at a low cost through an index fund? And why pay lifelong broker fees if you can buy a similar product without using a broker?
Why indeed? There is no logical answer to these questions, hence the first (and second) rule of the ‘Fee Club’: “Don’t talk about fees.” Instead, the marketing focuses on performance, pushing top-rated funds and managers into the spotlight so that their shadow conceals the many laggards.
Few investors know the full cost of their investment because the industry is adept at burying this information. Those wanting to know must piece it together themselves from fund fact sheets, contractual fine print and marketing brochures. Even then, it may not be the full picture, as some charges simply remain hidden for ever.
Incredibly, fees do not have to be disclosed on your benefit statement. Most investors see only the after-fee return. They are unaware to what extent their investment may have been diminished by administration fees, investment management fees, performance fees, broker fees, platform fees and initial fees.
This lack of transparency is so serious, even National Treasury warned* : “The retirement fund industry’s poor disclosure contributes to high charges and harmful inertia, as consumers are not able to compare products.”
Isn’t it time you looked into what you are paying? We strongly encourage you to FeeCA your RA fund. Do a fee confirmation and assessment. Find out what fees you’re paying and how they will impact your long-term savings outcome.
10X can help
As we said, piecing the costs together yourself is not easy and asking your broker or fund could prove taxing. Fortunately, there’s another way. With your written permission, we will contact your RA administrator and request full details of your fees. They would be obliged to give us this information.
To put those fees into context we would compare your current investment against 10X, and assess which one would give you more money at retirement based on just the fee difference. Our calculations would take account of any exit charge that your current provider might levy. (We are confident in our award-winning investment strategy, but for this exercise we would assume that both investments earned the same gross return.
Our RA fees are among the lowest in the industry so nine times out of ten, 10X comes out substantially ahead. If you proved to be one of the occasional exceptions, we would let you know and give you the peace of mind that you are getting a fair deal.
if you prefer to investigate yourself, please do so. Ultimately this is about you and your retirement lifestyle. But if you do want to put us to test, contact us and we’ll get in touch with you and do a free, no-obligation comparison.
* A safer financial sector to serve South Africa better’ issued with the 2011 Budget on 23 February 2011.
