Page 59 - Profiles's Unit Trusts & Collective Investments - September 2024

Costs and Pricing

Kickbacks and Rebates
All-In Fees Kickbacks, rebates and so-called “wholesale
The advent of broker funds and discounts” are commissions, often not disclosed, paid to
other white-label funds has seen an advisor or LISP by a manager. Typically a portion of a
the introduction of “all-in” fees. fee earned by an asset manager or LISP is paid back to an
The so-called all-in fee is an annual charge intermediary as a reward for selling the asset manager’s
levied by the management company which product, or paid by a manager to a LISP for
includes the trailer commission due to a administration services.
broker or LISP. All-in fees make for easier It is sometimes argued that a kickback is not really a
administration for brokers and clients: “hidden cost” and doesn’t affect the investor at all. This
instead of units possibly having to be sold to
pay trailer commissions (which can create argument contends that the portion of the manager’s fee
CGT events), the fund manager collects the being paid to the advisor or LISP was part of the
fee and remits the commission to the broker disclosed fees to begin with and would have been
or LISP. In comparing annual charges it is retained by the manager had it not been paid over to the
important to differentiate all-in fee structures advisor or LISP. The investor, therefore, is no worse off
from regular fee structures. than had the kickback not been paid – the amount
represented to the investor as available for investment
(after fees) has not changed.
While this is true, kickbacks do distort the investor’s perception of the amount that may have
been available for investment if all commissions and rebates were excluded (for example, by
choosing a competing product). Furthermore, kickbacks potentially distort the principle of
negotiated fees agreed by client and advisor: the client may not have agreed to the disclosed fee had
he or she 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 65.

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 the Unit Trust Control Act, 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
2.5% 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 for a 2/20 fund delivering 25% growth in a
year. Annual fees for South African money market funds average 0.31%.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 57