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Knowing what your investments cost

March 30, 2017

As we approach the end of the first quarter of 2017, the world is getting to grips with Brexit and US-imposed travel bans, and South  Africa is left aghast at the failure of the system to ensure that those in need will receive their grants.

To add insult to injury, the alleged perpetrator of the OR Tambo heist brags about his new sports car and thieves break into the Chief Justice’s offices … and the threat of a Gordhan guillotining looms.

As members of our respective retirement funds, however, we must continue to save as much as we can for those days when we require funds to sustain a contented life (that will, in all likelihood, not include the purchase of a Lamborghini), and not be dependent on a state grant!

Choosing the right investment
Last year, the Association for Savings and Investment South Africa (ASISA) developed the Effective Annual Cost (EAC) measure to provide a standard disclosure of the charges that an investor will most likely incur when investing and holding a specific financial product.

This measure is designed to assist the investor to make the right choice of investment from a cost perspective and enhance his chances of saving enough for the latter years of his life.

The EAC is a standardised disclosure method that can be used by consumers and financial advisers to compare charges and their impact on investment returns on most retail investment products. It is expressed as an annualised percentage.

The EAC comprises four components added together: Investment Management, Advice, Administration and Other (this includes all termination charges, penalties or loyalty bonus payments that are reasonably foreseen if the investor terminates his contract and withdraws all the funds at the end of the disclosure period).

The various product providers (investment houses and unit trust companies) have now created an EAC calculator, allowing potential investors to insert the aforementioned four components. This will perform an accurate comparison of underlying costs.

The role of the employer in an umbrella retirement fund
At the recent Pension Lawyers Association Conference in Cape Town, the following item on the agenda caught my eye: the role of the employer that participates in an umbrella retirement fund.

There is no guidance regarding the role of the employer in such an environment in the ambit of the Pension Funds Act; hence, it was proposed by the speaker, a highly-regarded pension lawyer, that the employer had a duty of care and responsibility in terms of the common law towards its employees that are members of the umbrella fund.

This suggests to us that employers and the institutional industry (retirement funds) as a whole should learn from the retail financial services sector (the unit trust and individual financial products) and create an EAC standard for investments offered to employers and their members on the umbrella funds.

There has been a perception of a lack of transparency and understanding of the costs of the various investment options available on the umbrella fund platforms, and this can be to the detriment of the member’s final outcome at retirement.

Finally …
The second quarter of 2017 will, no doubt, bring more geopolitical and economic news that will capture our interest. We hope that in the background there are moves afoot to implement an EAC in the retirement fund world in South Africa.

Those most in need must feel the benefit.

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