Stockbrokers in South Africa are charging fees as high as 1% on money they don’t even manage. These charges are levied on cash held by JSE Trustees, and billed for administration and charges related to the broker deal accounting (BDA) system that keeps records for the brokers.
While 1% might not sound like much, it is close to double what any investor would pay for administration on local unit trust platforms. It is also five times what JSE Trustees itself charges for the actual management of the money.
JSE Trustees is a separate company formed by the JSE to invest the surplus cash held by brokers belonging to their clients. It essentially runs a money market fund so that this cash is always immediately available, either to trade or to be withdrawn.
The management fee charged by the company is currently 0.2%.
What clients are paying
Moneyweb surveyed a number of local brokers to assess what fee they are charging for money held in this account by JSE Trustees. Of those that responded, all but one is charging their clients 1%.
This is an eye-watering administration fee at a time when pressure on costs across the investment industry has been severe. A recent survey of investment platforms in South Africa by The Collaborative Exchange shows that the highest administration fee charged by any platform is 0.58%, including value-added tax. Some have maximum fees of 0.48%.
Most unit trust platforms charge administration fees on a sliding scale, meaning that the more money you have invested, the lower the charge. The table below illustrates how this works at two of the country’s largest platforms, Allan Gray and Stanlib.
|Administration fees on unit trust platforms|
|First R1.5 million||0.5%||Accounts up to R2 million||0.48%|
|Next R3.5 million||0.2%||Accounts up to R4 million||0.2%|
|Balance above R5 million||0.1%||Accounts above R4 million||0.1%|
Source: Allan Gray and Stanlib
What value are clients getting?
When asked by Moneyweb to justify their much higher fee, the most frequent response from stockbrokers was that it is “in line” with what is levied by their competitors.
In other words, it is not a reflection of what it actually costs them to administer this money, but only of what a clearly inefficient market allows them to charge their clients for doing so.
While there is no question that there is work involved in this administration, it should be no more onerous than that required of those providing administration for funds on unit trust platforms.
Yet brokers are charging twice as much for this service.
What also makes it obvious that this fee is unnecessarily high is that not everyone charges this rate. Sanlam Private Wealth charges its clients only 0.5%. In other words, they are able to do the same job at half the price. Institutional clients who are aware of this fee have also been able to negotiate far lower administration costs with their brokers.
Of course institutional clients trade in much larger volumes, so there is more of an incentive for brokers to offer them better rates to attract business. However, the actual administration of their money with JSE Trustees is no less burdensome than it would be for any individual client.
Out of line
It is worth noting that it is not an enormous amount of money that is affected by these fees. Most client funds are actually invested in the stock market rather than sitting with JSE Trustees.
At the end of 2018, the exchange reported that JSE Trustees had just over R36 billion in funds under management. The previous year, this figure was R43 billion.
In the context of the overall investment industry, these are small figures. However, taking 1% off the actual return on these funds is meaningful for those whose money it is.
JSE Trustees is currently paying interest of around 7%, after deducting its own management fee.
Charging clients 1% for administration means brokers are taking 14% of that interest.
While all the brokers Moneyweb surveyed noted that they are transparent about these fees, this is nevertheless a demanding rate at which to charge clients. It may be in line with what other brokers charge, but it certainly isn’t in line with what is charged in other parts of the industry.