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What fees are you paying on your unit trusts?

31 May 2010 Mike Ronald, Marriott Asset Management
Mike Ronald

Mike Ronald

Mike Ronald, an investment professional at Marriott Asset Management, unpacks the various unit trust fees and gives investors a few tips

There are three different charges which investors may incur when buying unit trusts/collective investment schemes.

If the investments are purchased directly from the manager there are two fees payable:

  • An entry fee: variously called “initial charges” or “transaction fee”, which is a once off fee when the units are first purchased.
  • An annual fee: also called a “manager’s fee” or “service fee”, which is charged annually as a percentage of the value of the investment and is paid by the fund from its portfolio rather than charged individually against the client’s account. This charge then has the effect of reducing the price of the portfolio and is normally accrued every day. These fees can be a flat fee or a fee dependent upon the performance of the portfolio. The extent of this latter fee, sometimes called a performance fee, is not immediately obvious and would only be quantified by reference to the marketing material of the fund or the fund’s TER (total expense ratio). This can result in an investor not realising the full extent of the fees being paid.

In addition to these two, charges can be levied by an intermediary, if the investment is not purchased directly from the manager. These also take the form of entry fees and annual fees. Sometimes these are not part of the pricing of the product and hence the client would notice payment of these fees either from their capital or the income earned from the investment.

On top of this, financial advisors can also levy fees. There is a small move in South Africa for financial advisors to charge fees based on a visit or per hour basis, and to move away from those levied as a percentage of the asset size. This has the effect of the client being charged based on effort rather than a standard fee which is charged whether the financial advisor continues to offer service to the client or not.

Investors are becoming more mindful of charges for various financial services products, but they may not be aware of the fees being charged as they are built into the products. The fees get paid by the initial investment amount as opposed to being paid by another payment from the investor.

Some collective investment schemes pay annual fees from the income account of the product. This can be applied to fees levied either by the asset manager or the financial advisor and has the effect of reducing that income and thus the yield in the product.

My top tips for investors to assess the fees they pay on financial products would be:

  • Read the small print
  • Reconcile the amount you have invested with what it is worth now, taking into account roughly what markets have done. Any large negative variance may well be the effects of hidden charges.
  • Get your financial advisor to commit to writing the total charges related to the product.
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