Unit trusts range in price from 0.40% per annum to over 3% per annum. In practice this means the 3% unit trust would need to outperform the 0.4% one by 2.6% per annum just to deliver the same after-fees return to the investor! That is highly unlikely for most unit trusts. Even 1% per annum outperformance is a stretch. As such, it really is foolish to pay more on what is at best a “gamble” on outperformance.
Not convinced yet? Search the archives of Moneyweb for some recent articles written by Patrick Cairns to see just how the odds are stacked against you.
Begin the saving process by collating the names of all the unit trusts you own, then google them. Most asset management companies have websites on which they publish the minimum disclosure document or fund fact sheet (a monthly marketing document) for each unit trust they offer. By law, each fund fact sheet displays a TER figure (TER, or the “total expense ratio”, might be a footnote in small print, but it is there). This figure reflects exactly the fees you have paid. If that figure is higher than 1.5% per annum, you are overpaying.
Look for alternative, cheaper unit trusts from reputable companies. In 90% of the cases there are similar unit trusts with the same risk profile as what you are invested in being offered for as little as 0.40% per annum. Switching from an expensive unit trust to a cheaper one is a no-brainer.
By switching to a cheaper unit trust you can immediately save 1% per annum or more.
Most unit trusts are available through LISP platforms, such as those provided by Allan Gray, Investec, Glacier, Momentum and Sygnia. These administration companies bring together a wide choice of different unit trusts in one “supermarket” for your convenience. However, they charge a fee for that convenience (most charge 0.5% per annum).
Where possible, skip the LISP platform and invest directly with the asset management company. Simply call their Individual Investor call centre for help (most companies display contact details on their websites). There is more administration for you as you will receive multiple quarterly reports, but is the convenience of a single consolidated report worth the money you are paying?
Most of these savings wrappers are available through LISP platforms. In addition to offering a choice of unit trusts, these platforms also offer RAs, living annuities, preservation funds and tax-free savings accounts as “savings options”. All these savings products then offer you a selection of unit trusts to invest in.
The savings wrapper can represent a third layer of fees on top of the LISP fees and the unit trust fees.
So the first step in reducing fees is to follow Tip 1 and reduce the cost of your unit trust selection.
The second step is to look at the costs of the savings products themselves. Given that these products are fairly generic, you can shop around between the LISP platforms for the best deal. Ask how much you are paying for the LISP administration platform and for the savings product. Some LISP platforms charge one fee, others charge a double fee. Some offer their own unit trusts for free, i.e. there are no additional fees for the savings wrapper or LISP administration. As an example, Sygnia does not charge an administration fee or a savings product fee if you invest in Sygnia’s unit trusts.
If you are paying more than 0.5% per annum for the administration and the savings product combined, you are paying too much. You can easily switch from one platform and one savings product to another by filling out a transfer form. The new platform will assist in the process. If you are intimidated by the process, phone the new platform’s call centre and ask for assistance.
You can also split your investments amongst LISP platforms to maximise your cost savings. For example, if you invest in an Allan Gray unit trust through a LISP platform which charges 0.5%, move a portion of your product to the Allan Gray LISP platform which only charges 0.25% per annum if you use an Allan Gray unit trust. You can invest in multiple RAs split across different LISP platforms.
Many people employ financial advisors to help them navigate the choppy waters of savings. This is sensible and should be encouraged.
There are two types of financial advisors:
independents
agents representing financial services companies, such as Old Mutual and Sanlam.
Independent advisors charge negotiable advisory fees. If you use an independent advisor, look at the fees you’re paying. These should be between 0.5% and 0.75% per annum. Anything higher you can negotiate down unless you have only a small amount of savings.
If you are using a tied agent, you will pay automatic commission (usually 1%) for what amounts to “sales”. I would strongly suggest that you immediately shop for an independent advisor who has your best interests at heart (and not those of his employer), save the 1%, and use some of that saving to pay for the best independent advice you can get.
If you do not have a lot of money to save, or if your affairs are straightforward, consider cutting out this cost out altogether by using a robo-advisor. There are some which offer simple investment advice free of charge on a non-obligation basis. Google it and find out more.
If you are in formal employment you are probably a member of a retirement fund offered by your employer. For most people this is their largest “savings pot”. Go to your HR department for more details about the investment strategies available in your retirement fund. Many retirement funds offer investment options, so ask to see the details of the management fees for each option. Compare fees among the choices on offer and select a strategy at the lowest fee, always remembering that, unless you are close to retirement, you should invest in a high growth/aggressive investment strategy which has the highest probability of allowing you to maximise the growth of your savings.
If you have been tempted to make your own investment choices within a retirement fund, consider swapping to the default strategy selected by the board of trustees of the retirement fund, as this is likely to be the most cost-effective solution.
If you want to see more radical cost-cutting within your retirement fund, follow the lead of the National Treasury. As per their Draft Default Regulations issued in 2015, index-tracking or passive investments should be considered by boards of trustees. Write to the principal officer of your retirement fund and ask if the trustees of your fund have considered index-tracking strategies. You can more than halve your cost of saving from a management fee of 0.90% per annum (on average), to as little as 0.40%.
If your employer does not offer their own retirement fund but rather participates in an umbrella fund offered by a life insurance company, look at all the investment options available. It is likely that the umbrella fund will offer index-tracking solutions. A switch should once again enable you to halve your fees.
Ask your HR department for full disclosure of all fees and services provided by the umbrella fund. If there are services you don’t want, e.g. funeral cover or a wellness programme, opt out if you can.