Page 59 - Profile's Unit Trusts & Collective Investments - March 2025

Costs and Pricing

LISP is paid back to an intermediary as a reward for
All-In Fees selling the asset manager’s product, or paid by a
manager to a LISP for administration services.
The advent of broker funds and
other white-label funds has seen It is sometimes argued that a kickback is not really a
the introduction of “all-in” fees. “hidden cost” and doesn’t affect the investor at all. This
The so-called all-in fee is an annual charge argument contends that the portion of the manager’s fee
levied by the management company which being paid to the adviser or LISP was part of the
includes the trailer commission due to a disclosed fees to begin with and would have been
broker or LISP. All-in fees make for easier retained by the manager had it not been paid over to the
administration for brokers and clients: adviser or LISP. The investor, therefore, is no worse off
instead of units possibly having to be sold to than had the kickback not been paid – the amount
pay trailer commissions (which can create represented to the investor as available for investment
CGT events), the fund manager collects the (after fees) has not changed.
fee and remits the commission to the broker While this is true, kickbacks do distort the investor’s
or LISP. In comparing annual charges it is perception of the amount that may have been available
important to differentiate all-in fee structures for investment if all commissions and rebates were
from regular fee structures.
excluded (for example, by choosing a competing
product). Furthermore, kickbacks potentially distort the
principle of negotiated fees agreed by client and adviser: 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 adviser 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
adviser 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 64.
Annual Service 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. Charges against the portfolios are also defined and must be 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 advisers 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, could
amount to an effective 7.5% of initial investment for a fund charging a 2% annual fee and 20% of the
performance above a benchmark if the fund delivers 25% growth in a year. Annual fees for South
African money market funds average 0.31%.
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.

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