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Patience is needed in the great cost debate

08 October 2019 Jonathan Faurie

A few weeks ago, we published a newsletter which focused on a panel discussion that was held at the Financial Sector Conduct Authority (FSCA) Retirement Funds Conference. The newsletter focused on the costs associated with saving towards retirement.

Our conclusion was that the debate between costs being too high and costs not being too high ended in a stalemate. Nevertheless, the issues that were raised during the panel discussion at the conference once again illustrated the need to constantly have a vigorous debate regarding fees. 

In exclusive interviews with FAnews, Craig Gradidge CFP, Executive Director of Gradidge-Mahura Investments, and Dr Adrian Saville, Chief Executive at Cannon Asset Managers, gave their points of view about the cost of investing from a financial planner’s point of view. 

Ongoing focus

There was a consensus among both Gradidge and Saville that the debate has been a long standing one and increases in prominence as more awareness surrounding the issue is raised within the public eye. 

“The issue of fees is not a new one especially given the rise of passive investments in the past decade. However, I think what startled many people is seeing the impact of costs in Rands and cents. When you talk percentages, the numbers sound small, but seeing the Rands and cents accumulate over a period provides a clearer sense of the numbers,” says Gradidge. 

According to Dr Saville, two issues are central to the debate surrounding the cost of investing. These are the capacity to outperform the industry benchmark and the cost of doing it. 

“There is a lot of current evidence that the ability to beat the global benchmark is low. This is being exacerbated by the increased focus on funds that have lower fees. When looking at the fee debate, it needs to be done objectively and with a specific purpose in mind. What is the value that you are getting for the fees that you are paying? This should be the foundation upon which you question fees,” says Dr Saville. 

Caution, danger ahead

The fee debate is an emotive issue. At the end of the day, the biggest detractor of value when it comes to investing is fees. 

Gradidge and Dr Saville both agree that to focus on a single aspect of the debate in isolation is dangerous. “When approaching the cost debate, clients and advisers should focus on all of the costs and understand what they are paying for so that they can ascertain if they are getting value for money,” said Gradidge. 

Dr Saville echoed the sentiments about the necessity to question costs in terms of the return on investment (ROI) and pointed to several cases where staff at Canon Asset Managers came across investments where the fees were entirely inappropriate. 

“Cannon Asset Managers came across solutions where clients were paying fees of between 6% and 7% per annum on default products. These are products that were not special and were not looking for significant returns. They were mostly tracking the benchmark,” said Dr Saville. 

In the public eye

Armed with the information that costs need to be evaluated against ROI, the fact that the cost debate was held at the inaugural FSCA Retirement Funds Conference is a good thing. 

“Every forum is a good forum to debate this issue especially if people respond by interrogating the fees that they are paying. It becomes even better if they then move to products which offer better value for money for them as an investor. The Regulator is a key role player in the industry so a discussion at one of their forums is good,” says Gradidge. 

Of equal importance is the fact that the new standard that was released by the Association of Savings and Investments South Africa (ASISA) dictates that all costs need to be expressed as a percentage of the total value of the investment. 

“Every role player when it comes to managing investments needs to be held accountable for the fees that exist in the industry. It can be argued that each of these role players have an equal responsibility to interrogate fees. The whole industry needs to sit down and figure out a solution to the fee debate, but the outcome of the debate cannot be suboptimal investment returns,” says Dr Saville. 

Patience is needed

One of the questions that is often asked to government is why investment costs are so high. This can form the basis of a specific rhetoric which takes centre stage in the costs debate, which Dr Saville pointed out can be dangerous. Making sweeping statements regarding the cost of investing does not resolve the debate. 

The fact that the regulator is debating this issue at public platforms is a good sign that the issue is being addressed within the highest possible political circles. Patience is needed at this stage of the debate. 

Editor’s Thoughts:
There are some horror stories when it comes to the cost debate. What is the industry success stories where value offsets costs? Let us know. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Peter Dexter, 08 Oct 2019
The greater the advice, guidance and involvement of the planner and asset manager the greater the costs will be. There is no such thing as a free lunch. However, they should be adding value. Of greater concern is government's interest in retirement savings and the potential abuse of prescribed assets regulations to prop up failing SOE's. If implemented this will have a devastating effect on retirement savings.
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