Page 57 - Profiles's Unit Trusts & Collective Investments - September 2024

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
In the unit trust industry, the clean or platforms in South Africa still charge initial fees.
price (also sometimes called the Where the term is used it usually refers to upfront fees
flat price) refers to the value of the portfolio payable to an intermediary for advice services, not to a
before taking into account accrued income. deduction that flows directly to the manager or LISP
Accrued income (interest and dividends due) (which was how initial charges worked under the old
per unit is added to the clean price per unit to Unit Trusts Control Act).
arrive at the NAV.
In terms of CISCA, charges are completely
More recently, “clean pricing” (in the active deregulated, and managers of collective investment
tense) refers to full disclosure and no “unseen”
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 2024 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).
Switching Semantic confusion can arise when talking about
Switching is the movement of an initial fees – especially where LISPs are involved. Some
investment from one fund/CIS to intermediaries and fund managers use the term “initial
another. fees” for the CIS manager portion only, and do not
include any other upfront fees – this can lead to a
An investor may switch unit trusts, for example,
when his or her investment objectives change misunderstanding regarding the actual costs and what
or because of a change in market conditions. an investor thinks he or she is paying. At Profile
Media, we often use the term “entry costs” to describe
Most management companies make it easy to
switch from one fund to another within their the total upfront costs which apply when buying units
ownfamilyoffunds. A feature of LISPsisthat or participatory interests – which could include,
they make it easy to switch across different depending on the channel, advice fees (in the form of
management companies. broker commission) and platform fees.
Switching may incur fees although many By aggregating transactions from many retail
managers and platforms now offer free investors, LISPs (platforms) “buy in bulk” from
switches (see Switching Costs section). management companies and qualify for lower
“institutional” fees – although 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 or advisor fee. Since fees
were deregulated under CISCA, the relationship between initial fees and broker/advisor fees can be
confusing. Initial charges and broker/advisor fees have, to a large extent, become separate items,
although they may still be lumped together as one deduction. Under any scenario, however,
broker/advisor fees must be explicitly approved by the client. In short, advice fees 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 an advice fee is part of the initial fee. Eg, an initial fee of 5% (5.75% including VAT) includes
an advice fee of 3% (3.45% including VAT) which is paid to the broker by the manager. Most

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 55