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How do service providers justify their fees?

The investment management fee is generally a standard fee that does not change often or change depending on the performance.

If you take my portfolio, offshore and my living annuity, and strip out any exchange benefits (as I currently don’t reside in South Africa and any dividends/growth would be measured in pounds, dollars or rands for local investments), over the past two-and-a-half years my portfolio has performed as follows:

  • Overall, down by (0.25%);
  • Broker commission approximately 1.24% for the period; and
  • Fund management fee 2.5% for the period.

In these times of hardship, how do service providers justify charging these fees on rather poor performance?

Here is a confirmation on the fees charged by investment company XYZ:

  Living annuity Offshore investment
Investment management fee 0.81% 1.64%
Administration fee 0.33% 0.57%
Advice fee 1.15% 1.00%
Total Fee 2.30% 3.24%

Breakdown on the fees charged:

  • Investment management fee: This fee is payable to the fund manager. Please note that this fee does not get deducted from the capital value invested and is built into the unit price.
  • Administration fee: This fee is payable to the investment company as an admin fee to utilise the platform and for the ongoing administration service they provide. This fee works on a sliding scale as follows:
    • Living Annuity: The investment company charges an annual administration fee (excluding VAT) of:
      • A maximum of 0.5% on the first R1.5m;
      • 2% on the next R3.5m; and
      • 1% on the balance of the market value across all local platform investments linked to a policyholder’s investor number as assigned by investment company XYZ.
    • Offshore: The administrator charges a maximum annual administration fee (excluding VAT) of:
      • 5% on the first $400 000 (or foreign currency equivalent);
      • 2% on the balance of the market value across all offshore platform investments linked to your investment number as assigned by the administrator.
  • Advisor fee: This is the fee payable to the financial advisor to actively manage your portfolio to ensure you are invested in the correct mix and advise should a switch need to be made.
    • The fees you will see being deducted from the capital value of your investment will be the service provider’s administration fee and the advisor fee.

All investments, like the ones above, are treated the same in terms of fees. The investment management fee is generally a standard fee that does not change often or change depending on the performance.

I can confirm that the returns of the investment have been massively affected by the Covid-19 pandemic. No matter where one was invested the global markets got hit the hardest in March 2020. I can, however, confirm that during these unsettling times we have been actively managing your portfolio and we have made the relevant switches into fund classes that could offer some protection during these volatile times.

Does any company work on a performance basis? They only charge and get paid for positive growth in a portfolio. I often get the feeling that my capital is subsidising your marketing efforts and high overheads.

As mentioned above no matter where invested, during these crazy times, your investments would have been impacted by the pandemic. The fees earned by financial advisors is to actively manage your portfolio which we have done. We will continue to watch your investment, make the relevant changes, and take advantages of opportunities that may come up as the markets slowly start to recover again.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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