Almost without exception, wherever you invest, your fee will be calculated as a percentage of your investment. In many cases, you will be charged more than one fee on the same pot of money on this basis.
For example, if your financial advisor has invested you in a unit trust through a fund platform, you will probably be paying three percentage-based fees – one to the advisor, one to the platform, and one to the fund manager.
If your advisor takes 0.5%, the platform another 0.5% and the fund manager 1%, that is 2% of your money being paid in fees every year.
While some platforms do reduce their fees as the value of your investments grows above a few million, broadly these fees are set regardless of how much money is involved. Whether you have R500 000 or R5 million, you will still be paying 2%.
In rand terms, this is a significant difference. A 2% fee on R500 000 is R10 000. On R5 million, it is R100 000.
Put another way, every time you add to your investment, or receive a positive return, your fees goes up. Yet the service you will be receiving is no different.
Regardless of the sum of money you have, you are invested in the same fund, being administered by the same people, and guided by the same advisor.
So what’s the deal?
It is true that R5 million will attract higher transaction costs than R500 000. However, these won’t be 10 times more. And apart from those costs, there is no higher burden on any of the service providers just because your assets have increased.
The financial services industry may well argue that the reason for this is that there has to be some level of cross-subsidisation. It is never economically viable to manage small sums of money. Those with more therefore pay more, in rand terms, so that those with less are still able to receive the same service.
There is some merit to this argument. To enable everyone to have access to investment services, fees have to be kept manageable for those with smaller amounts.
It does, however, beg the question of what it actually costs to manage someone’s money. And what is that management worth to the end investor?
This is a particularly problematic issue because few investors actually appreciate, or ever see, the nominal amount they are paying. Fees are simply deducted from the investment return without the investor ever knowing that they have gone.
If you have R5 million invested and your total annual fee is R100 000, that is significant. You would be paying a large amount of money out every year without ever really feeling the impact, because you don’t see the sum actually leaving your account.
This is why this week’s announcement by OUTvest – that it is introducing a single, flat-fee for all investors from R300 000 – should give the rest of the industry something to think about.
The company is asking a question nobody in financial services has dared to pose before.
“The idea we had was to ask what does it cost to run an investment service,” says OUTvest MD Grant Locke. “The figure we came to was R4 500 per year, Vat inclusive.”
As an online platform, OUTvest offers robo-advice, all the administration, and the underlying portfolios. Its offering includes tax-free savings accounts, general investment accounts and retirement annuities (RAs). Any of these can be accessed for that single fixed fee.
How it works is that OUTvest will charge investors an all-inclusive fee of 1.5% on all accounts below R300 000. Once an investor reaches that threshold, however, they will be placed on the flat annual fee of R4 500 until their account reaches R2.25 million.
At that point, the effective percentage fee that they will be paying is just 0.2%. Fees on any amount above R2.25 million will then be charged at the 0.2% rate, in order to ensure that transaction costs are covered.
“I don’t think there is anyone in South Africa who will charge you 20 basis points, all inclusive, on an RA,” says Locke. “In fact, I haven’t seen a fee globally that matches that.”
Will others follow?
The impact this could have on what investors are actually paying is enormous. As the graph below illustrates, compared to a 3% fee, a fixed fee of R4 500 is one tenth of what an investor with R1.5 million would be paying, and the ratio continues to fall beyond that.
With this fee structure, OUTvest is effectively laying a challenge to the rest of the industry. Investors can now, rightly, start asking what the service they are receiving is actually worth.
If OUTvest can do it for R4 500 per year, why can’t anybody else?