Declaring war on investment costs

Making adequate provision for retirement is no easy task. There are many obstacles for even the most astute investor to overcome. It is common knowledge, for example, that time is the most precious asset in any retirement planner’s toolkit. Because the earlier you begin saving the more time your investments have to benefit from compound interest and compound annual returns.

If ‘time’ is the retirement planners ally; then cost is certainly their worst enemy. You’re all familiar with the range of fees levied on retirement and investment products. There are administration fees, asset management fees, one-off initial fees, monthly commissions and any range of creative add-ons dreamt up by product providers over time. But times are changing and there’s a growing industry-wide acceptance that fees need to be curtailed to the overall benefit of the country’s retirement and savings landscape.

Do annual management fees really cause that much damage?

Rob Rusconi of Tres Consulting recently provided a table to indicate the impact of annual asset management fees on long-term savings. Assuming regular monthly contributions escalating by 7% per annum and an annual return on assets of 10% the impact can be quite significant. Over thirty years a 1% asset management charge will lead to a reduction of 14.1% in long-term savings, with a 2% charge ‘costing’ the investor 28.3%.

The total percentage ‘sacrificed’ varies over time depends on the timing, size and frequency of inward investments and the actual gains achieved on the invested funds. What is even more alarming is that most retirement savers pay multiple asset management fees. They may, for instance, pay their financial planners an annual fee (based on invested funds) and incur the management fees in various products the financial advisers invest them in.

Possibly the cheapest entry to the stock market – ever

At the invite of Satrix, Rob Rusconi conducted a detailed study of the Satrix range of Exchange Traded Funds to see how they stacked up against conventional unit trusts where costs were concerned. His analysis showed that the product had a TER of just 0.37%. At first glance the 0.37% annual charge on the Satrix ETF is fantastic and a credit to the product provider. But investors should remember what Rusconi said at the start of his presentation. He advised the audience that his assessment of the product was based on the product only, and ignored the costs of access to the product. If your money could mysteriously appear in a Satrix account you’d be over the moon.

In reality you’re going to incur additional charges on your investment journey. Investors who purchase directly on the JSE through their stock broker will incur brokerage fees and holding costs in line with other ordinary broker transactions. And those who invest directly through Satrix will pay 0.1% in brokerage and an additional 1% per annum in plan administration fees. A 1% charge doesn’t sound unreasonable; but consider an investor who has R100 000 (not a huge amount in today’s terms) invested in the product for a period of 12 months. This individual will pay R1 000 (or more depending on fund performance) for the ‘privilege’ of owning a Satrix investment. And that’s about as much as some of us pay for a basic banking service...

Cast your minds back to the various discussions on governments National Social Security System and you’ll recall that when Chile implemented a similar system there goal was an investment solution that cost less than 0.5% per annum. And we guess that’s going to be the challenge to the country’s various investment product providers. Just imagine the benefit to the country’s retirement savers – and the country as a whole – if this could be achieved.

Editor’s thoughts:
How low can they go? We’re willing to bet that the majority of the country’s asset managers, financial advisers and retirement fund administrators would choke at the thought of a 0.5% total annual cost. It would certainly require that many layers of fat be trimmed from the industry. Our question to you is whether a retirement savings solution could ever function optimally on 0.5% in annual fees? Add your comments below, or send them to gareth@fanews.co.za