Page 63 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Costs and Pricing

It is sometimes argued that a kickback is not really a
“hidden cost” and doesn’t affect the investor at all. This All-In Fees
argument contends that the portion of the manager’s fee The advent of broker funds and
being paid to the advisor or LISP was part of the other white-label funds has seen
disclosed fees to begin with and would have been the introduction of “all-in” fees.
retained by the manager had it not been paid over to the The so-called all-in fee is an annual charge
advisor or LISP. The investor, therefore, is no worse off levied by the management company which
than had the kickback not been paid – the amount includes the trailer commission due to a
represented to the investor as available for investment broker or LISP. All-in fees make for easier
(after fees) has not changed. administration for brokers and clients:
While this is true, kickbacks do distort the investor’s instead of units possibly having to be sold to
perception of the amount that may have been available pay trailer commissions (which can create
for investment if all commissions and rebates were CGT events), the fund manager collects the
excluded (for example, by choosing a competing fee and remits the commission to the broker
product). Furthermore, kickbacks potentially distort the or LISP. In comparing annual charges it is
principle of negotiated commissions agreed by client important to differentiate all-in fee structures
and advisor: the client may not have agreed to the from regular fee structures.
disclosed fee had he known about the kickback.
Even if one accepts the dubious “no loss to the investor” argument, kickbacks have two more
insidious harmful effects. Firstly, they may predispose an advisor or LISP to push investors into
funds offering the most attractive kickbacks rather than considering the clients’ best interests.
Secondly, where they are not disclosed they create a hidden cost which makes it impossible for
investors to fully understand the fees and to objectively compare the costs of competing products.
Even where they are disclosed kickbacks are inherently less transparent than regular fees and
significantly complicate the task of calculating and comparing costs.
In a circular published in January 2013 the FSCA directed that all payments made to a financial
advisor must be disclosed to the investor and the investor’s consent must be given for all
payments, including kickbacks. The impact of fees and commission on investment performance
should also be disclosed.
Note that some ETFs use rebates to deal with progressive fee structures (eg, where
investments above a certain threshold enjoy a lower annual fee). See Unit Classes, page 69.
Annual Service Fees
As already mentioned, CISCA does not place any constraints upon initial charges. It does, however,
strictly define what managers may charge against the portfolio by way of costs and annual fees.
Annual service fees are the fees charged by the manager or management company for asset
management and related services. These fees are expressed as a percentage of the funds under
management.
Under UTCA, annual service fees were regulated (until 1998), and a cap was placed on the
maximum initial fees that could be charged by a management company. Under CISCA, service fees
are unregulated, and managers may charge what they like provided fees are fully disclosed.
Annual fees today are anything from under 0.10% on the lowest cost passive fund available to over
4% on the most expensive active fund unit classes (excluding performance fees). Given the complete
deregulation of fees under CISCA even higher fees could be charged by collective investment schemes
– the only requirement is full disclosure. It is up to advisors and investors to make sure they are fully
aware of all fees which may be charged by a fund. Hedge fund fees, inclusive of performance fees,
would amount to an effective 7.5% of initial investment (6.0% of gross TAR) for a 2/20 fund delivering
25% growth in a year. Annual fees for South African money market funds average 0.41%.
Management fees are quoted as an annual percentage, but in practice they are recovered
monthly or even daily by the fund. A portfolio with a net asset value of R2bn, for example, and an
annual service fee of 1% is entitled to recover R20m per annum in fees.
Given that portfolio values change daily, however, the manager may choose to recover 1/365 per
day, based on the daily valuation. This amounts to around R55 000 per day on a portfolio of R2bn.

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