On our front page today, we report on the announcement by the JSE Securities Exchange that it has registered its exchange traded funds (the three Satrix funds) as collective investment schemes. Collective investment schemes include unit trust funds.
One of the major selling points of the Satrix funds is their low investment costs. There are two main reasons why the costs are low:
- Satrix pays its way by lending the shares you own through Satrix in the derivative market; and
- As Satrix is an index-linked investment, it does not need squads of analysts to decide where your money should be invested.
This does not mean that Satrix's products are always the cheapest in the collective investment schemes market. Some unit trust index funds may be cheaper - it all depends on how you purchase your Satrix holdings or a unit trust management company's index fund.
Issues that affect costs include:
- Whether you buy through a stockbroker or invest directly;
- Whether any commissions are payable to sales people; and
- Whether you are investing a lump sum or an amount each month.
Apart from this week's report on Satrix, over the past two weeks Personal Finance has been taking an extensive look at the costs of financial products. Two weeks ago, we covered unit trust costs, and last week we published an article on the costs of life assurance endowment policies.
The reason for this focus on costs is that few people are aware of the extent to which costs affect their investments over the long term.
Costs may vary dramatically, even between products of the same kind, such as a Satrix fund. Costs vary more widely between different products sold by the same sector of the financial services industry - for example, unit trusts. Costs vary even more between different products sold by different sectors of the industry - say, life assurance endowment policies versus unit trust funds.
In some cases, the higher costs are justified. For example, you may want the capital guarantees that life assurance companies provide on certain policies, or you may believe a more expensive investment will produce better returns.
Despite the current slow-down in the inflation rate, the costs of many financial products have been climbing steadily, particularly in the unit trust industry. In a high-inflation environment, these high costs can be papered over - but not now, and you, the investor, must put pressure on companies to keep costs down.
In a low-inflation environment, high costs rip the heart out of an investment's performance. The reason is that as inflation drops, so do:
- The profits of companies which make up the underlying investments in equity portfolios; and
- The interest rates on cash and bond investments.
As the returns fall, so the high costs, which are fixed, gobble up an ever-greater percentage of your returns.
Fees and commissions
A significant generator of costs are the commissions and fees paid to financial advisers. Often, more than half an investment's costs can be attributed to commissions and fees.
Since unit trust costs were deregulated in 1998, most unit trust management companies have been hiking their costs, including commissions.
Now, management companies are not only paying financial advisers an initial fee, but also an annual fee - ostensibly for giving you advice on your investment.
Meanwhile, life assurance com-panies have found a way to sidestep the legislation governing commissions by calling commissions "fees".
There are a number of problems with all of this, including the fact that many financial advisers know very little about investing. There is absolutely no reason why an adviser who does not have the skills of an investment manager should be paid an annual fee if he or she cannot give you proper investment advice.
A person is only qualified to give you investment advice if:
- He or she is registered with the Financial Services Board (FSB) as an investment manager; and/or
- He or she has passed the examinations to qualify as a Certified Financial Planner; and/or
- He or she is a Certified Financial Analyst.
Obtaining advice from anyone else will more than likely impoverish you.
The sorry saga of living annuities, which has left thousands of pensioners facing destitution because of bad investment advice, shows that the greater financial services industry is more interested in achieving sales targets than in providing you with appropriate advice.
If the financial services industry wants to force you to deal with sales people who masquerade as investment advisers and pay them high commissions, the industry should, at the very least, ensure that its sales staff is properly qualified. And don't be taken in by the argument that an adviser who is registered in terms of the Financial Advisory and Intermediary Services (FAIS) Act is automatically properly qualified. The qualification requirements to be registered as an adviser in terms of the FAIS Act are the absolute minimum.
What makes matters worse is that many financial services companies refuse to reduce their fees when you deal directly with them to avoid receiving bad advice, rather than go through an adviser.
Four lessons
There are four lessons to be learnt from all this (and they apply to all financial products):
1.
Compare like with like. First, decide which type of products are appropriate for your financial strategy. Cost should not be the first, or the deciding, factor. Once you have decided on the products, compare what different companies charge for them.
2.
Count the costs. Take account of total costs when making any investment. Demand to be shown the total costs (and, separately, the costs of fees and commissions) in three ways:
- As the rand amount you will pay over the entire investment period;
- As a percentage of your investment; and
- On a "reduced yield" basis. A reduced yield shows you how the costs will reduce the return you will finally receive. This should be calculated by taking all costs, assuming a rate of return (say, 10 percent) and then comparing this figure with what your final total return would have been if no costs had been levied.
3.
Negotiate. Only pay a financial adviser for his or her level of skill and for the actual services he or she provides. Remember, deducting a broker commission of 0.25 percent from your investment every year can make a huge difference to the return you finally receive.
You are allowed to, and should, negotiate these commissions (both upfront and ongoing). Nevertheless, some companies will not agree to reduce the charges, particularly the ongoing ones.
4.
Avoid the rip-off companies. If you want to deal directly with a company, but the company will not waive its commission/fees (calling them "marketing fees" or something similar), consider using another company that will. Quite simply, this seems to be an anti-competitive practice and should be investigated by the Competition Commission.
*****
Last week, we quoted Jabu Moleketi, the Deputy Minister of Finance, as saying that you should not deal with any unregistered financial adviser after the FAIS Act is fully implemented on October 1 this year.
Moleketi also warned that the Act is not a guarantee that you will never be ripped off or badly advised. You still have a responsibility to protect yourself by staying informed and not simply relying on someone else's opinion.
Of great concern currently is that the rip-off artists are out to make a final big killing before the FAIS Act is fully implemented. There is an upsurge of con artists selling extremely high-risk investments, promising investors incredible wealth.
You invest in these schemes at your peril. You should be wary of any product or company that is not registered with the FSB (and check with the FSB that it is), and that is offering returns higher than those obtainable in the money markets.