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How much is investment management worth?

A disruptive new fee structure raises the question.
With its announcement this week, OUTvest is effectively laying a challenge to the rest of the industry. Image: Shutterstock

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.

The disruptor

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.

Source: OUTvest

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?

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hereshoping
I really wish other institutions would follow this example. I cringe every month when I see my charges and the market is not doing very well.
I hope all banks and advisors ha,ha read this. Really wants you to look around for advice that is worth the charges being levied.

Easyequities!

Easy Equity is fine but you need to invest tax free once a year only in one Exchange Traded Fund so that you only pay 0.2% fees for the year.

Fees and taxes kill the returns on investments.

Yanni why?

Easy Equities charge 0.2% per transaction with no minimum. Thus is you buy 10 x 1000 or a x 10000 the fees stays the same?

What am I missing?

DanieMare You are right Lol. Maths wasn’t my strongest subject at school. I don’t look at the amount on Easyequities, I look at percentage, so if I invest R10 000 for the year I pay 0.2% total fees for the year but if I invest R1000 every months for 10 months I see that I pay 2% fees for the year in percentage, but you do pay the same amount of money in fees.

I should look at things in money terms, I am looking at in percentages.

Thanks for the education.

Do they do RAs?

I agree with the general sentiment towards fees, and it is good to highlight this issue. The main issue here is that over time 3 managers have gained massive market share of the investment industry in SA (AG, Investec and Coronation). With very large AuMs and a ‘fixed’ fee irrespective of investment size the financial leverage is huge. As AuM grows their ability to provide superior returns to their customers decline. Look at how sad it is to see the once proud AG starting to compare themselves to the average fund manager instead of a market index to earn performance fees. The main issue here is that above market returns have been poor as market concentration to the large managers have increased, in effect curtailing their own ability to create alpha. Now trying to fix the problem by reducing fees will not address this problem. If fees reduce, the barriers to entry for smaller players to compete with the large managers will increase (small players can’t be financially viable at low fees). So you will get your lower fees at the expense of alpha as the large asset managers will get even less competition. Advisors need to understand that by not doing their job and by playing it safe with the CIA is going to cause their own demise as they will also increasingly get squeezed on fees, as a result of not doing their jobs properly.

DanieMare, I have been thinking about it, there is a reason to invest tax free once a year a lump sum into Easyequities and that is bank charges. You pay bank charges everytime you transfer money from your bank account to Easyequities bank account. Every cent counts.

Not sure with which bank you bank, but there are no bank charges on EasyEquities’ side when doing an EFT to them.

I do not pay a single cent when doing an EFT. Maybe if you bank with Capitec, but then you saved on the bank fee to start out with.

Fund Managers should add the nominal fee amount instead of a % in their statements, customers seeing the actual monthly amount will get a shock compared to other monthly costs. Fund managers will argue that it’s hard to calculate although they seem to have no problem calculating a nominal amount at bonus time.

Being saying for years. Give me the gross return, and bill me the fee for the year and sell the needed units to pay.

That will wake people up

Absolutely. I charge per hour with my clients’ consent. They agree, in writing, to the rate, the time and sometimes a cap per job/task. If they do not wish to be invoiced by me they may agree, in writing, to the product supplier’s (pre-agreed between us) fees being deducted from their investment. Very often the client is happy to trade off the investment fee from their investment (@ never more that 0.5% p.a. sometimes with a cap). This is due to cash flow, though this can be argued both ways if this is desirable. It is the client’s decision at all times.
There are many other services an estate planner/financial advisor (not so much of the investment advisor title) should be performing; reviews of Wills, marriage agreements, business partnership agreements, personal risk tolerances, projections and forecasts, considerations of health costs, budgeting, it really is a long list. These services come at a written pre-agreed cost between us.
I agree with capping fees. In my experience the better off clients with larger investments demand a lot more time from me. They may be more analytical than others but usually the larger investments are spread over wider selections of products as well as markets; such as off-shore & currencies. A feeder fund has its’ place but it is not a panacea to all investing selections. Our time spent is not always as simple as might be made out to be.

Fees kills investment. Financial industry is business full of fat cats looking to enrich themselves through fees at your expense. Financial advisers bring nothing to the table. Fund Manager, Financial advisers do what is the best for themselves, not what is best for you. Everyone works for their own pocket.

Morning star works out if a person pays 3% total fees a year on a fund over 40 years they will get like 30% less than if they paid total fees of 1% or less a year.

In the United States there are Exchange Traded Funds that only charge 0.04% management fees a year.

Tax free investing directly yourself without a financial adviser in a good Exchange Traded Fund with low management fees is the best for the individual investor.

Managment Fees in South Africa are still too high.

But here’s the problem. The platform is rather impersonal and wealthy people need the personal attention from advisors to support their Ego’s.

Since it is completely passive lets play it against its peers

Returns:
2019 CORESHARES OUTMODERATE INDEX FUND = 10.8%
2019 Nedgroup Investments Core Accelerated = 9.06%
2019 Prescient Balanced Fund = 11.29%
2019 Sygnia Skeleton Balanced 70 = 12.5%
2019 Satrix Balanced Index = 10.03%
2019 10X High Equity = 10.60%
2019 Stanlib High Equity Passive Balanced = 9.89%

Most of these providers charge fees well below 1% (for amounts under R300 000) and you could avoid paying an Advisor to invest with them directly (Like OutVest).

Some have done much better for cheaper than R4500.

My point here is that i think Outvest has come really late to the party and also it is important not to ignore the value a FA can add to a portfolio so dont be too quick to cut them out.

But great paid marketing patrick also the active guys are going to be very quite when debating this.

The returns above are from fact sheets so all net of investment management fees

I would rather take a 12% net return at a 2% fee than a 9% net return at a 0.2% fee.

90% fund managers won’t outperform the market in a 10 year period and for period more than 10 years the amount of fund managers in the world that will outperform the market you could count on one hand so in reality you will be paying 2% fees a year on 9% return a year when you could just be paying just 0.2% fees on 9% return a year.

If you pay 3% management fees a year for 40 years instead of just 1% fees you will get 30% less money in 40 years.

Fees matter. Independent Research by MorningStar showed that fees were the most important factor regarding how much money you got out of an investment in the long term.

Agree most people think that 2% fee buys you some skill or advantage. The stats does not support this.

OK – so with your example:
Active give you gross return 14% – 2% fee for 12%
Passive (I assume because of the fee) gives you 9.2% – 0.2% fee for 9%

That means, the active manager had to outperform the benchmark by 52% (15-9.2 / 9.2)

Now get them to write you a guarantee that they will do that year in and year out, THEN WE ALLL will be happy to pay the 2%

Agreed daniemare. A likely scenario is that even while paying the exhobitant 2% fee, the active manager is likely to lose you money over the long run.

Warren Buffet famously challenged them publicly using a $1m dollar passive investment account. They lost spectacularly.

Active management is no longer credible and just not worth it. Too risky vs passive index investing.

I pay <1% all-in for any SA funds I have. Offshore slightly more due to wrapper platform fees added. The 2% random number illustrated my point of gross versus net.
I care about the highest gross return (that is return after costs including fees and tax) , achieved at the least risk , with a robust company that gives good service (answers the phone when there is a problem , gives good tax compliance documentation reliability , does not go bust, etc)

We are not comparing apples with apples here. If the investor has to make the investment decisions himself, then he does not even need OUTvest. OUTvest is actually charging a fee for something that is generally available free of charge. Nice try though….

The graph is not a fair comparison as the OUT fees do not include the fees on the underlying investments. To be fair, they are quite low with the OUTmoderate Index Fund having a TIC (all-in cost) of 0.41%.

Still, to compare only a platform fee (which is what you get for R4500/m with Outvest) to a 3% fee that includes advice, platform and fund management is a bit misleading. Also, most platform fees decline as the investment amount increases.

Yes, OUTvest will be cheaper, but the investor then only has five funds to choose from. This will be fine for those starting saving but may not suit investors with more funds, especially those that want more than the 30% allowed offshore.

You get what you pay for…

OK, small error on my part. CoreShares dropped the management fees on the index funds to 0% effective Sept 2019, so the OutVest model is quite attractive IF you only want to invest in a passive multi-asset portfolio.

Still limiting for larger, more sophisticated investors but then they probably don’t worry too much about fees.

To use some crude analogies:

John and Jack are both of the same age and the same health. Should John’s insurace premium for cover of R500,000 be the same as jack’s for R5 million? It’s the same work after all.

A conveyancer submits two sale transactions to the deeds office. One valued at R1 million, the other one at R10 million. Should he charge the same? Assume both are rejected and have to be submitted – are the amounts suffered in damages the same?

An advisor advises on an investment to two parties. One for R100,000, the other for R1million. The fund goes belly up and the adviser sued for negligence and compensation. Should the risk he takes on in his advice be limited to the same amount? Will his PI cover be happy with a similar premium to cover both these instances?

Clearly the answer is no, and the price paid should be commensurate with the risk undertaken.

Or do it yourself, pay no fees and hope for the best.

agreed. very crude anologies.

the insurance example has an explicit promise to pay the differing amounts. Risk is taken on by the insurer for a premium. For advisors when a client loses money, the advisor still takes the cut. The investment risk remains with the client. The advisor always takes the commission.

In the conveyancing example the conveyancer should charge 10x fee for 10x house value? I presume this would be for all the value the conveyancer created in the house??

Arguing that the possibilty of negligent, stupid or downright dishonest advice means that a % should be charged in all cases seems a little self-serving.

Here’s the other side:

Two guys go and buy a pizza. Should they be charged the fixed price of the pizza or the % value of their networth?

A plumber comes to fix my house, should he charge me a fixed price based on the value of his skills and scope of work or should it be based on the value of the house?

A dentist does what he/she does, do I pay based on my networth?

Et cetera.

I find the ‘risk’ part of your comment quite amusing. In the fine print it clearly states that the active manager takes no risks.

The client takes all the risks while the active manager takes 100% of his stated fees. In some cases there are even performance bonuses in those rare years where he outperformed but ironically there are no penalties when he under performs.

So again, what risk are you talking about?

Apples with apples? Compare performance of funds versus peers.

Exactly the question I ask myself frequently. I have serious doubt that the advice is worth much more than a nominal fee. I saved for over 40 years for my retirement investments. My current draw-down on my life annuities managed by one of the large SA investment companies is 2% – the permissible minimum draw-down. My gross management fees paid on that managed investment is slightly more than my draw-down. What do I get in return? I have to share my income more or less equally with a third party for an investment in a basket of company unit trusts that have remained static for over 5 years and has shown very little real growth; an annual meeting at which I am presented with attractive-looking computer generated graphs of historic SA investment growth (that might have value in a politically and economically stable first world country) with a demonstrably over-optimistic growth forecast based on those graphs; persistent pressures to move my privately managed (and better performing) local and off-shore investments to my managed portfolio with the company; tales on the good performance of local investment over off-shore investments (which never mind just the substantial exchange rate related growth over the past 10 years is readily refuted by simple numbers – and does anybody really believe that the Rand will ever again strengthen appreciably?); an annually emailed, standard-form, template “advice” with minor adjustments to panel beat it into a semblance of something personal; and a quarterly statement with investment platitudes, some regurgitated, stale investment advice, elaborate excuses for poor performance and tepid attempts to generate optimism for greater investment in the local market. Do these really add value for me? Is it worth 2%?

Move your AN. 10X brags about 1% fee?

Wake me up when someone offers a sub 0.1% etf with 0 brokerage. Until then I’ll stick to my US brokerage thanks.

Let the free market decide.No-one forces you to use any asset manager or investment advisor. Let them charge what they want. Freedom of choice, a free press and the internet will sort out these issues very soon. If you want someone to look after your money, pay them. If they don’t add value, fire them and do it yourself. But stop complaining about fees.
Shoprite is 20% cheaper than Woolworths, but I prefer buying at Woolies. Don’t call on them to reduce their prices to SR levels. As I said, it’s a free world and the free market will decide.

Whilst I agree fully with market forces, you need a willing buyer/seller AND full disclosure that the participants understand.

Your example about SR and Woolies. How informed will you be about that cost differential if they did not put prices on their shelves but rather charged you 3% of the monthly salary of the person behind you, taken of your salary at the end of the month?

So I am all for “charge what you want”, but that has to come with better understanding of the actual fee

Excellent offering – Well done OUTvest. 0.2% for admin, multi-asset funds and advice is outstanding.

It is definitely not worth a third of your yield. Then may as well buy 9% bonds directly and earn risk free double the net after costs that the professionals generate

The bond is yielding 9% coz it is not risk-free

You should use a fee calculator to see how much more you’d get. What’s the point of locking your money up and being tax free, If you can just invest probably paying tax only on the gains and still beat a traditional RA. I feel like fess are like a tax on my money. You just miss out on the tax rebate.

It isn’t worth a cent

Why do you say so this given that even index funds charge management fees?

Can investment fees come down? Sure. Are unit trusts fees in South Africa too high? No. Latest international research shows unit trust fees in this country to be average versus a large group of mostly developed markets. But fees don’t actually have to come down because investors can exercise their preference and move to lower cost providers.

Having been in financial planning industry for 30 years I realise that clients want to see you regularly to discuss performance and the economic prospects. An appointment of this nature often means a long drive – in Joburg thats the case. They dont want to deal with a recently trained call centre agent or a bot.
The more they invest the more they e pect to see you. It is mainly people who are more mature who have the money and they want to talk to a senior advisor with ideas and knowledge. We are often very expensive, experienced and educated. That is an expensive resource.
Fortunately the clients are smart so they realise they have to deal with smart people. ROBO advice is fine but who do you fight with when it hits the fan.

That’s all well and good. The issue at hand is not that we don’t want to pay for the service, the issue is the manner in which we are charged for that service.

Lawyers, surgeons, accountants, and many other professionals are also expensive, well trained and educated but they charge a transparent Rand based fee. They don’t charge a % of your networth.

That is the issue here.

Alemen: EXACTLY my feeling. Is there a difference in effort managing a R10m fund vs a R10,000m fund? There is a thousand times difference in fees for the same thing……… My dentist does not charge “professional” fees for a filling based on my net worth. Why do investment “professionals” get away with this?

Grindrod bank showed that they can run a retail bank service for something like R4/month. I would imagine that the complexity of recording the Rx contribution per month to a unit trust and a statement each month showing the value is FAR cheaper than a retail bank account. So account admin cannot matter unless these people are idiots.

End of comments.

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