Fees and charges disclosed… there’s no disputing that fact

In the FAIS Ombud newsletter, there was a resolved complaint concerning fees and charges on Collective Investment Scheme (Unit Trust) Investments, which we thought would be interesting to share with our readers.

Effects of fees and charges on investments

According to the FAIS Ombud, fees and charges are unavoidable when investing, and lead to what is commonly referred to as a cost or performance drag, which is the magnitude of the difference that costs make on the performance of a portfolio over time. Often, there are three costs associated with a collective investment scheme namely, financial advisory fees, administrator or platform fees, and investment manager fees.

The administrative or platform fees are related to a Linked Investment Service Provider (LISP), which is a company that enables the client to invest in a wide range of collective investment schemes, via one entry point or platform. Investment managers charge an annual fee (as a % of assets) for the day-to-day management of the investment or fund. And the one most prevalent to this Office is the financial advisory fees, which the financial adviser will charge for the rendering of financial service.

The effects of fees and charges have a compounding effect over time, i.e., cost drag, and can be illustrated with this simple example: If one starts with a lump sum contribution of R500 000, and the client receives a return of 10%, with costs of 3%, the value of the client’s portfolio at the end of year one would be R535 000. The total portfolio value after 10 years will be R983 576, this will grow to R1 934 842 after 20 years and after 30 years it will be R3 806 128. Take the same R500 000, with the same 10% return, but with costs reduced to 1% and the total portfolio value after one year would be R545 000, R1 183 682 after 10 years, R2 802 205 after 20 years and R6 633 839 after 30 years. This means that a mere 2% difference in fees, could potentially see a R2 827 712 difference in the value of one’s portfolio over a period of 30 years.

It is, therefore, of paramount importance that a financial adviser discloses not only the fees and charges applicable to a client’s investment but the effects that these fees and charges can have on the performance of the client’s investment. This will allow the client the opportunity to make an informed decision especially when he or she considers that financial advisory fees for one, that can range between 0% and 3% are indeed negotiable.

U versus S

The complainant claims to have received a phone call from a representative of the respondent, telling her that she must come and see her so she can invest her money in an account that would perform better than the money market account where her funds were currently invested.

At their first meeting, the complainant asked the respondent’s representative whether there would be a cost involved. Upon hearing that costs would be incurred, the complainant claimed that she was not interested, as her funds were currently not attracting any monthly fees. The respondent’s representative then assured her that if she signed for a 1-year fixed term then after 3 months the respondent would pay back all costs into the investment account. Based on this and the fact that the projected growth of 5-6% way outperformed the money market account she was currently invested in, the complainant agreed to invest R100 000.

When they met a second time after 3 months the complainant asked why the fees of R34 000 had not yet been paid back, the respondent’s representative however denied having ever made such an undertaking, and despite several attempts to contact the representative, the complainant never heard from her again. The complainant then escalated the matter with the respondent and the investigation concluded with the respondent being unable to assist her claiming that she had signed and initialled the application form and all relevant documents. The complainant then approached this Office for assistance. The respondent’s initial response to the complaint was that the complainant had failed to provide definitive proof that its representative had promised that the fees and charges would be paid back into the investment after 3 months.

Duly disclosed and agreed upon

This Office then provided the respondent with a document, a fund fact sheet, where its representative had in her own handwriting provided such an undertaking, which she had also signed. This undertaking was made not once but twice in July 2021 and then again during December 2021. The respondent’s further response was that no investment product or fund in the industry guarantees or offers any refund of fees after a specific period and that these investment products pay upfront advice fees which get deducted from the investment at inception with the net investment amount then being given full market exposure (invested).

The respondent was satisfied that this aspect had been duly disclosed and agreed upon by the client and that although these notes were made the client did have the actual fund factsheet of the fund explaining the product, fees, charge structure, etc. The respondent was also of the view that the compliance documentation forms the basis of the contractual agreement regarding the investment made and that respectfully, no reliance could be put on external documentation which would attempt to contradict the pricing of the product agreed upon.

This Office once again communicated to the respondent, that its representative had indeed disclosed the fees and charges to be deducted, there can be no disputing that fact. The concern for this Office was that the handwritten notes, that were signed and dated by its representative and which its representative does not dispute, and which cannot be ignored, were false and had misled the complainant. In the absence of this misrepresentation, the complainant would not have accepted the investment as fees and charges were of importance to her in making such a decision. The respondent was asked to reconsider its stance and that it looks to resolve this matter with the complainant. The respondent reverted with an offer of R25 149, the was based on the difference between the original investment of R100 000 and that fund value of R874 851 as of 2 November 2021. The complainant accepted this offer that saw her original R100 000 returned to her.

Writer’s thoughts
The lessons learned… fees and charges, according to the FAIS Ombud, can over time have a significant effect on the performance of a portfolio, and whilst they cannot be totally avoided, advisers must disclose all fees and charges and their potential impact so that the client can make an informed decision as to whether the investment product being recommended is appropriate for his or her needs and circumstances. Advisory fees can be negotiated, and whilst it is only natural that financial services providers seek to be remunerated for their efforts in respect of the financial service rendered, it should be after it has been agreed upon between the two parties in view of the quality of service provided. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - [email protected]

NOTE:  After publishing contact was made with the FIAS Ombud who confirmed that there was a typo in the newsletter and that the investment was in fact R1 000 000 and not R100 000.

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