PRETORIA: We all have to save for our retirement, but often annual fees and upfront fees erode the total compound value of your retirement savings without you knowing the full extent of it. It is against this backdrop that iTransact, a financial services provider and Exchange Traded Products Investment Platform, which caters for Financial Advisors, launched a new-generation exchange traded fund (ETF)-based retirement annuity (RA).
In an interview with Moneyweb’s Market Update on SAfm Lance Solms, a director at iTransact, said that an advantage of the ETF-RA is the low costs associated with an exchange-traded fund.
This is true. ETFs are usually cheaper than unit trusts or a portfolio of equity investments, as these funds simply passively track indexes, cutting out the costs associated with an active fund manager. In a letter posted on the etfSA website last year, CEO Mike Brown said that the Total Expense Ratios of index tracking unit trusts are typically much higher than for ETF index trackers (see Table 1).
Total Expense Ratios are however only the first layer of expenses for unit trusts. The second is the cost to access the product (the platform fees) that differ from investor to investor (see Table 2).
iTransact offers a choice of three risk adjusted portfolios of ETFs modeled to meet the prudential investment requirements of regulation 28 of the Pension Funds Act as well as the same tax benefits as traditional RAs - where you can claim back from the South African Revenue Service for RA contributions made.
Even though this may be a good option to consider when looking at saving for your retirement, it is important to look at all the costs that will be incurred for this ETF-based RA.
Three levels of costs
Based on additional information Solms sent Moneyweb, it’s clear that there are three different layers of fees involved: initial fees, ongoing fees and platform fees. As iTransact only works through financial advisors it is important to note that the financial advisor may negotiate a maximum of 3% upfront fee and/or a maximum ongoing advice fee of 1% with the investor.
In a specific example sent through by Solms (see below – NB excludes VAT) the initial fee includes a stock brokerage fee of 0.1% of the sum invested (in the case of a lump sum) and an investor protection levy of 0.0002%. Ongoing fees include fees for the Asset Manager, e.g. when choosing the cautious portfolio the total expense ratio is 0.35%. In Solms’ example there is also a portfolio management ongoing fee of 0.25%. On top of this are platform fees depending on what your lump sum investment is.
Using Solms' example of a R1m lump sum investment (see table below) and an ongoing advice fee from the financial advisor of 0.5%, the fees look as follows:
Total initial fees = 0.10002% or R1 002
Ongoing fees = 1.1% or R11 000
Platform fees = 0.625% or R6 250.
Under the frequently asked questions on the website, iTransact indicates that the initial advice fee and ongoing advice fee (negotiated by the advisor with the investor) is paid monthly. The total costs for the R1m thus comes to R18 252 or 1.8%. Without the initial fees this is 1.725% in total.
Nominal regulatory and trade settlement fees will also come into play as well as a R3.50 debit order charge per month if you invest a small amount per month.
A quick comparison with some retirement annuity funds available in the market shows that other RAs would also have three levels of costs – administration per annum, unit trust total expense ratio and the advisor fee. For one financial services provider the cost of all three of these levels could be as much as 3%, but also lower than the 1.725% of the ETF-RA example.
There are advantages
A very attractive advantage could possibly be that there are no penalties with the ETF-RA and that the investor can stop or start his or her premiums as they wish. It still has the characteristic feature of all RAs, in that it forces you to save, with no access to the savings before the age of 55.
Solms said that the low-cost retirement product is also accessible for the small amount of R450 per month or a minimum lump sum of R5 000.
The three portfolios are set out below
Cautious (lower risk) portfolio:
On a back-tested basis the portfolio before costs would have provided an average annual return of 13.2% for the past two years.
- Absa NewGold ETF (Gold bullion) 3%
- Absa ILBI (inflation-linked government bonds) 24%
- Absa TRACI ETF (a money market ETF) 52 %
- Proptrax Sapy (listed property) 15%
- Satrix DIVI (tracks superior dividends) 6%
Balanced (medium risk) portfolio:
On a back-tested basis the portfolio before costs would have provided an average annual return of 17.2% for the past two years.
- Absa NewGold: 2%
- Absa ILBI: 46 %
- Absa TRACI: 12 %
- Proptrax SAPY: 25%
- Satrix DIVI: 15%
Growth (higher risk) portfolio:
On a back-tested basis the portfolio before costs would have provided an average annual return of 16.9% for the past two years.
- Absa NewGold: 2%
- Absa ILBI: 20 %
- Proptrax SAPY: 25 %
- Satrix DIVI: 53 %