Page 55 - Profile's Unit Trusts & Collective Investments - March 2026

Costs and pricing Chapter 3

Even if one accepts the dubious “no loss to the
investor” argument, kickbacks have two more insidious All-in fees
harmful effects. Firstly, they may predispose an adviser The advent of broker funds and
or LISP to push investors into funds offering the most other white label funds has seen
attractive kickbacks rather than considering the clients’ the introduction of all-in fees. The
best interests. Secondly, where they are not disclosed so-called all-in fee is an annual charge levied by the
they create a hidden cost which makes it impossible for management company which includes the trailer
investors to fully understand the fees and to objectively commission due to a broker or LISP. All-in fees make
compare the costs of competing products. for easier administration for brokers and clients:
Even where they are disclosed kickbacks are inherently instead of units possibly having to be sold to pay
less transparent than regular fees and significantly trailer commissions (which can create CGT events),
complicate the task of calculating and comparing costs. the fund manager collects the fee and remits the
In a circular published in January 2013, the FSCA commission to the broker or LISP. In comparing
directed that all payments made to a financial adviser annual charges it is important to differentiate all-in
must be disclosed to the investor and the investor’s fee structures from regular fee structures.
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 60 .
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.
Performance fees
Performance fees, designed to motivate fund managers to focus on fund performance rather
than inflows, have become increasingly popular, not least because they increase revenue for the
management company when good returns are achieved. The calculation of performance fees can
be complex, and care must be taken when looking at performance fees to see if they are fair on
investors.
Excluding hedge funds, a minority of South African retail unit trusts make provision for performance
fees. All hedge funds currently work on a performance fee model, usually at 20% of outperformance.
The influence of this category has been felt in the industry. At least two dozen unit trusts now have
performance fees of 20% of the outperformance of benchmark, a model which was unheard of
before the advent of hedge funds. Although most of these fees are capped (notably, a few are not),
investors could still lose up to a fifth of index outperformance (just because of performance fees).

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