Blue Chip Journal - June 2019 edition

FEES
The hidden cost
of retirement
Understanding fees is key to better performance
Maximising clients’ retirement
income is one of the financial
advisor’s most important
duties, which means cutting
costs wherever possible. Retirement fund
fees, for example, are often higher than
they need to be. An understanding of how
to reduce these sometimes very subtly
structured fees is therefore imperative
for every financial advisor. We spoke to
Quaniet Richards, Head of Institutional
Business at Nedgroup Investments, for
more insight.
For some time, the retail market has been
subject to effective annual cost disclosure
where service providers disclose all the
fees entailed in unit trusts, retirement
annuities or other products. This includes
transactional costs, which investors don’t
see and did not use to be readily disclosed.
However, things can get complicated in the
umbrella fund stage.
“It is really hard for a Board of Trustees
of retirement funds to compare apples
and apples if they want to switch from a
standalone fund to an umbrella fund,” says
Richards.
“Each umbrella fund has different fee
structures and often all the fees weren’t
disclosed or effected in a consistent
manner. For example, an umbrella fund
might charge an annual administration
fee of, by way of example, 0.2%, provided
that the fund has been chosen from the
approved list of funds.
"If you choose a fund outside of the
approved list, you have to pay an additional
admin fee of 0.35%. The boards of trustees
sometimes don’t quite realise that there
is this additional cost. Compare that to
another umbrella fund which charges an
all-in fee of 1.5% including investment
charges. It becomes quite tricky in terms
of understanding the effective cost on the
actual member.”
Once the Board of Trustees has made
a decision on behalf of a member, the
member needs to understand the implications
of the fee structures. All too often,
misunderstanding gives rise to confusion
when a member looks at their statement
and thinks “I’ve under-performed”.
Fee structures typically consist
of an investment management fee,
administration fee, risk benefit charges and
consultant fee, if a consultant is required on
the retirement fund.
“Now for each of those, the fee
structures could vary from one service
provider to another, especially the
administration and risk benefit charges,”
says Richards. “In my experience, during
the members' report-back session, they
tend to confuse investment management
performance and the impact of fees.
Administration and risk benefit fees often
have a bigger, negative impact on overall
investment perfomance for members,
greater than just the investment
management fee.
“The past five years have been tough,”
Richards admits, “and investment returns
haven't always kept up with inflation, but
if you deduct all your admin charges and
your risk benefits cost, then your returns
are even lower. At the end of the day,
members are suffering because the fee
structures are so opaque that Boards of
Trustees struggle to understand them.”
It was in recognition of this state
of affairs that the Association for
Savings and Investment South Africa
(ASISA) instituted the retirement
savings cost disclosure whereby, as of
1 March 2019, all umbrella funds have
to report their costs consistently so
that boards of trustees and retirement
fund management committees can
better understand what they are getting
themselves into.
For Richards, it is tremendously important
for members to be educated on how
fees are implemented, especially when
they enter the post-retirement world and
the fees really begin to bite.
“Some people entering retirement are
being charged a 0.5% ongoing advice fee
on their retirement assets, the biggest
sum of money they have ever had. The fee
may have been disclosed, but if they were
educated, they would understand why they
are paying it and that after two years they
can stop. Education can therefore make
a huge difference in the post-retirement
world where people often run out of money
before they die.”
For Richards, the most important point
for investors to realise is the impact that
higher fees have on their investment
portfolios. “Paying higher fees erodes your
retirement savings pool prior to retirement,
while paying higher fees in the postretirement
world affects the quality of life
by reducing income and impairing lifestyle.
“Some of the analysis we’ve done
suggests that members are saving up to
a R1-million or more, depending on their
retirement savings investment, in fees
alone,” he concludes.
Quaniet Richards, Head of Institutional
Business at Nedgroup Investments
www.bluechipjournal.co.za
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