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How much are you paying for your RA?

And what value are you getting?

Last year the Association for Savings and Investment South Africa (Asisa) introduced the Effective Annual Cost (EAC) standard. This was a significant move to help investors make direct comparisons of the costs of different financial products.

The idea was to make sure that there was a standardised measure used across the industry so that comparisons were genuinely done on an “apples with apples” basis. All costs would have to be disclosed in certain brackets and expressed as a percentage of assets invested.

Historically, different products had not only shown costs in different ways, but many had layered costs in ways that were very difficult for investors to understand. Setting a standard to ensure that investors were truly aware of what they would be paying and could compare this across different providers was therefore a big step.

However, the truth is that it hasn’t delivered the neat solution that many might have been hoping for. I have discovered this over the last few weeks as I have tried to gauge the true costs of different retirement annuity (RA) products.

It began with an analysis of low cost RA providers and what they would charge on a lump sum investment. This proved to be fairly straightforward and the EACs allowed for a simple comparison.

Essentially, these products were all fairly similar in structure. Each of them offered an investment into an underlying fund through an RA platform, and in the absence of any advice fee that was all that needed to be considered.

When I wanted to extend the same analysis to include life insurers, however, things grew a little more complicated.

The immediate problem was that it was not so easy to get EACs out of some of the insurers. It seems that a number of them are still coming to terms with the concept.

Given the industry’s reputation, my immediate concern was that they were reluctant to show the true costs or that they were trying to hide something. But recent conversations with product providers have left me with the impression that there is a genuine desire to reform, reduce costs and be more transparent.

In fact, Old Mutual provided figures showing that a lump sum invested into the South African Retirement Annuity Fund through their XtraMAX solution could cost as little as 0.3% over five years, before advice fees.

The problem, therefore, is something else. And it may start with the fact that in many of these products there is a lot more going on inside them, making an EAC measure a little less effective than it may seem at face value.

Innovation in the RA industry has been such that many providers have come out with products that offer guarantees, for example, or bonuses for remaining invested. These will come at a cost, but how do you quantify their value?

Many of them also offer ‘premium holidays’ if some financial difficulty prevents you from making monthly payments for a period of time. However, these are not standardised. Momentum’s Investo RA allows investors to skip four months over their investment period without penalty, while Sanlam’s Cumulus Echo allows 12 months. How do you assign value to one or the other?

Some RAs may also continue to pay your monthly contributions for the duration of the policy if you become disabled. Again, there is a value attached to that that is very difficult to quantify and certainly can’t be captured by just looking at an EAC.

I don’t want to suggest that the EAC is a failed concept. Far from it. It is a necessary improvement. But it doesn’t tell you everything.

Certainly what it does do is highlight the costs to investors of terminating their RA policies early. Figures calculated by Sanlam show that products from some providers would cost as much as 34% of the invested amount if they were cancelled after the first 12 months.

These costs do reduce significantly over the life of the product, and in some cases even become competitive if the RA runs to a full term over 25 years or more. However, they are a reminder that the flexibility and simplicity of unit trust-linked RAs have become appealing for good reason.

The challenge for investors and financial advisers is to assess the pros and cons that come with the range of options now available. The EAC is part of that analysis, but it can’t be all of it.

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Pretty cool article, this theme can be used for a whole series of articles I believe. Also explaining the tax breaks with each product may help people understand which is best for them.

Keep it simple – stay away from insurance RA’s, stick with unit trust RA’s.

Bang on Bylo

After 33 years in this business, all I can say is stay away from any insurance product that tries to be an investment.

If you want to insure your life or your car – go to an insurance company, however, if you want an investment – steer far away from them.

This is a good measure to compare similar RA’s costs. But most people won’t understand the costs unless it is expressed in rand terms.My client’s struggle to understand differences in % terms, particularly small ones, i.e. the difference between 0.75% and 1.2%. RA providers can use the growth over the last 5 , 7, 10 and 20 years to calculate the estimated reduction in fund value, in rand terms, over the same time periods in the future. This is not a perfect solution, but it will meet the needs of the clients much better than a percentage.

RA’s with features like guarantees can then list these separately and then clients can see what these features will cost them in terms of a reduction in fund value, which is what they are actually interested in.

Surely your clients who are paid enough to make an RA a part of a desirable investment / retirement savings plan are sufficiently educated to understand the concept of percentages and how they apply to compounding. Just saying, but with our schooling / university pass rates the way they are, perhaps not… 🙂

EIsh. my old style Sanlam RA’s are maturing this year. In my ignorance was sold to me with life insurance included.BIG mistake.Only discovered it few years ago and cancelled it. Growth last year was about 5% if my monthly premiums excluded. Could have gotten 8.83 % fixed investment with Nedbank. Maybe Sanlam can explain it in 10 words or less.

Explaining it in 10 words is easy.

“It made a lot of money (for Sanlam of course).”

At least you have had the benefit of tax deductibility of the contributions (up to certain maxima). I hope you DID claim your tax relief which up to a few years ago would have included the “premiums” for the life cover element.

Life companies are great at complicating the simple. The revenue life company’s report to shareholders equals the fees they deduce from their clients investments ie. they are the same thing. How can life companies deduct fees from clients, report these to shareholders, pay management bonuses etc. yet they can’t tell the client what fees they have charged them. Disclosure: I’m the CEO of 10X Investments

What platform does x10 use that’s different from using other platforms

Hi Steven,
I have asked this many times before, but yet to receive an answer from you. 10X is very vocal about the impact of fees on you long term retirements savings, a sentiment I fully share and support.

My question is still, why will I opt to go with 10X who touches 1% before VAT in fees (I know it reduces as my money on investment increases per a tiered costing structure) if I can have a Sygnia product for instance at 45 basis points?

What benefits do I get from 10X over Sygnia, who both follow a passive approach to reduce fees (another principle I support), because clearly you are not the cheapest.

And if qualitative factors should be considered, is that not then exactly the argument of the Corros, AGs and Insurers of the world?

Danie, I can only comment on 10X’s value proposition and why we started 10X. The investment industry is complex, confusing, expensive and opaque. There are over 1400 unit trusts alone to choose from and the list grows weekly as companies launch new funds trying to capture the latest fads. This even applies to index funds where companies launch competing index funds rather than one solution. It is impossible for most people to figure out how to invest in this environment.
10X provides a simple solution (without complex or competing choices) that is low cost, transparent and delivers competitive returns. All our clients, from farm workers to CEOs are invested in the same portfolios. 10X provides a holistic solution from the time the investor starts planning their investment until their investment matures. 10X’s services comprise guidance (personalised online investment planning tools, telephone support and face to face engagements for higher investment balances), we provide the investment portfolios (time driven portfolios using index funds), the administration with access via sms, smart phone web, ongoing communication, personalised monitoring tools to ensure you are on track to meet your goal etc. We charge one fee for this entire service ranging from 0.3% to 0.9% plus VAT. Since inception in January 2008 to 30 November 2016, the 10X High Equity Fund has returned 11.15% pa versus 10.4% pa for the average fund manager per the Alexander Forbes Manager Watch Survey (Global Best

So your clients are paying mainly for your administration costs to support your offering and not for sustainable investment performance which is beyond your control?? If the Index does not perform, you still charge between 0,3% to 0,9% pa. plus VAT, EVERY YEAR?
The proverbial question still is: What is the Value-Add or Incentive to use 10X?

What about all those suckers paying double or more for the 80% of managed funds (especially balanced funds), where the investment is then not beyond that funds control since it’s not just in indexes, and then get worse performance than the index?

Yes supersunbird, they also are suckers!!?? Too many gullible people around today and too many superslick sales bods who exploit them with limited or biased/outdated information

Supersunbird, they definitely are suckers if they are paying double or more and get worse performance than the index? HOWEVER, if you choose the top fund mangers today, who have a proven track record of Alpha, then your argument falls away.
Moral of the story: choose the few top fund managers and ignore the 80% that do not perform. This gave 10X and Sygnia a window of opportunity – however, they still have to prove themselves over the long term, i.e. 10-15 years plus

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