Page 61 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Costs and Pricing

Initial Fees
Clean Price/
There has been a huge swing away from initial fees Clean Pricing
in the unit trust industry, and very few fund managers
or platforms in South Africa still charge initial fees. In the unit trust industry, the clean
Where the term is used it usually refers to upfront price (also sometimes called the flat price)
commissions payable to an intermediary for advice refers to the value of the portfolio before taking
into account accrued income. Accrued income
services, not to a deduction that flows directly to the (interest and dividends due) per unit is added to
manager or LISP (which was how initial charges the clean price per unit to arrive at the NAV.
worked under the old Unit Trusts Control Act).
More recently, “clean pricing” (in the active
In terms of CISCA, charges are completely tense) refers to full disclosure and no “unseen”
deregulated, and managers of collective investment fees or hidden charges. (Other classes may
schemes can, quite literally, charge whatever they like – contain within the disclosed fee, for example,
provided all costs are fully disclosed. CISCA does not, in both administration charges and the annual
fact, directly address the issue of initial charges. The Act investment management fee. The admin fee is
defines what charges can be made by the manager often paid as a rebate to a LISP.)
against the portfolio, but places no limits on what initial Where a fund has several classes, the “clean
charges can be deducted before participatory interests class” does not include any other fees (such as
are purchased. Note that it is becoming the norm to not administration fees) on top of the investment
charge initial fees. As at July 2021 only a tiny minority management fee. The clean class, in other
of localretailfunds were stilllevying anysortofinitial words, is a unit class which does not contain
fee (considering only direct manco charges and not any rebatable fee portion.
counting platform fees where applicable). This excludes
commissions payable to financial advisors (occasionally
compulsory, usually negotiable).
Semantic confusion can arise when talking about Switching
initial fees – especially where LISPs are involved. Some Switching is the movement of an
intermediaries and fund managers use the term “initial investment from one fund/CIS to
fees” for the CIS manager portion only, and do not another.
include any other upfront fees – this can lead to a An investor may switch unit trusts, for example,
misunderstanding regarding the actual costs and what when his investment objectives change or
an investor thinks he is paying. At Profile Media, we because of a change in market conditions.
often use the term “entry costs” to describe the total Most management companies make it easy to
upfront costs which apply when buying units or switch from one fund to another within their
participatory interests – which could include, ownfamilyoffunds. A feature of LISPsisthat
depending on the channel, advice fees (in the form of they make it easy to switch across different
broker commission) and platform fees. management companies.
By aggregating transactions from many retail Switching may incur fees although many
investors, LISPs (platforms) "buy in bulk" from mancos managers and platforms now offer free
and qualify for lower "institutional" fees – although switches (see Switching Costs section).
note that not all funds have institutional unit classes.
In the past this meant investors potentially got an attractive discount on entry costs if they went
through a LISP; today the discount through a LISP, where applicable, is usually in the ongoing
costs rather than the entry costs.
Broker Fees/Commissions
Initial fees quoted by a manager or LISP may or may not include a broker fee. Since fees were
deregulated under CISCA, the relationship between initial fees and broker commissions can be
confusing. Initial charges and broker fees have, to a large extent, become separate items, although they
may still be lumped together as one deduction. Under any scenario, however, broker fees must be
explicitly approved by the client. In short, commissions must be fully disclosed, are inherently
negotiable, and must be agreed between client and advisor.
Tied brokers (typically employees of large institutions) may work within old legacy systems where
commission is part of the initial fee. Eg, an initial fee of 5% (5.75% including VAT) includes commission
of 3% (3.45% including VAT) which is paid to the broker by the manager. Most managers, however,

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts