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

Costs and pricing Chapter 3

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 adviser or LISP was part of the disclosed other white label funds has seen
fees to begin with and would have been retained by the the introduction of all-in fees. The
manager had it not been paid over to the adviser or LISP. so-called all-in fee is an annual charge levied by the
The investor, therefore, is no worse off than had the management company which includes the trailer
kickback not been paid – the amount represented to the commission due to a broker or LISP. All-in fees make
investor as available for investment (after fees) has not for easier administration for brokers and clients:
changed. instead of units possibly having to be sold to pay
While this is true, kickbacks do distort the investor’s trailer commissions (which can create CGT events),
perception of the amount that may have been available the fund manager collects the fee and remits the
for investment if all commissions and rebates were commission to the broker or LISP. In comparing
excluded (for example, by choosing a competing annual charges it is important to differentiate all-in
product). Furthermore, kickbacks potentially distort the fee structures from regular fee structures.
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 7.0% 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 0.30%.
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 September 2025 57