It is important to take note of the fees and charges on your investment as even though the numbers may sound small – one or two percent - they can create a significant drag on the returns you earn over long periods.
If your return is just 9% and inflation is four percent, you are only earning a real (after inflation) return of 5%. If you are paying 1% in fees, the fee makes up 20% of your real returns.
The fees on unit trust funds are not regulated, which means there is no limit on the fees funds can charge, but all fees must be disclosed as either initial fees or ongoing fees.
Initial fees
Most unit trust funds no longer charge initial fees. If they do, these once-off fees are taken off before your money is used to buy units in the fund and are used to cover administration costs.
Ongoing fees
All funds charge ongoing management fees – fees that are deducted on a regular basis as long as you are invested, and are used:
The fees range from 0.1% a year of the value of your investment for the cheapest passively managed fund to 2% for the most expensive actively managed funds.
The management fees are quoted as an annual percentage charge, but can be levied daily or monthly on the actual value of your investment at that point.
The fees may be fixed or they may depend on performance. Fees based on performance are typically split into a base fee that is always applied and a performance fee that is applied when returns are above a certain level. The idea behind performance fees is that you only pay when the manager delivers good performance and that this should align your interests (getting good returns) with those of the manager (earning a good fee).
In practice, implementing performance fees can be quite complex. Read more: How performance fees are calculated
All funds also incur investment charges. These cover the costs of investing in securities such as brokerage and the securities transfer tax that managers must pay. These costs should also be disclosed to you.
Advice fees
If you use a financial adviser to get advice about where to invest, your adviser’s fees will most likely be deducted from your investment. There are a few advisers who charge you directly for their advice and do not collect their fees from your fund.
Some financial advisers still charge initial fees and these fees can be deducted before your money is used to buy units.
Financial advisers also typically charge ongoing fees of between 0.5% and 1%. Some of your units will be sold to cover these fees.
Platform fees
If you are investing through an investment platform, you may also pay an ongoing administration fee to the platform provider (linked investment services provider).
Unit trust companies offer different fee classes depending on how you are investing.
The class of fees you pay when investing through a platform, for example, may be lower than if you invested directly because it is easier for the unit trust management company to deal with bulk investments through the investment platform than to deal with individual investors.
| THE ABCs OF INVESTMENT PLATFORMS AND UNIT TRUST FEE CLASSES
If you invest in a unit trust fund through an investment platform, you will most probably invest in a different fee class to what you would have if you had invested directly with the unit trust management company. As an individual investor, investing directly with a unit trust management company, you would typically invest in an A class fund. If you invested before April 2000, you may have an R class fund. This is the fee class for investors whose fees were subject to regulation (before 1998) and the fee cannot be changed. If you are investing through an investment platform through a retirement fund, tax-free saving account or some other financial product, and depending on your adviser, you may be in a fee class denoted by a B, C, or some other letter of the alphabet. The fees in these classes are typically lower than those for direct investors, as the platform bulks the purchase and sale of funds from all investors on the platform. Platforms offer further discounts to investors who are clients of financial advisers who recommend their clients use the platform. Any conflicts advisers have must, however, be disclosed to you. Fees may also be lower for institutional investors such as retirement funds. Some unit trust companies pay rebates, or kickbacks, to the platforms for listing their funds. The rebates share the savings the unit trust management company achieves on administration when platforms bulk investments into their funds. The investment platform may use the rebate to reduce your platform fee, but some do not disclose what the rebate is and how much of it is passed on to you. Some funds offer an all-in fee class that includes the cost of the platform and a fee paid to your financial adviser in the fee that is deducted from your unit value. This makes it harder for you to know what each fee is. These fee classes are being phased out. It is much more transparent for each entity to charge the actual fee: the unit trust management company to lower its fee for bulked investments on a platform, for the platform to reflect their true administration costs in its fee without any hidden or disclosed rebates, and the adviser to charge an advice fee. This is what is known as clean pricing. A proposal in the Financial Sector Conduct Authority’s Retail Distribution Review – the set of proposals on how financial products should be sold to you - suggests all platforms and unit trust companies should adopt clean pricing. Many platforms and unit trust companies have introduced this practice for new investors and are encouraging existing investors to move to clean pricing fee classes. Some platforms do not charge a platform fee if you invest in funds from a unit trust management company in the same financial group. This practice is being reviewed by the FSCA which is concerned about platforms steering investors to particular funds when it may not be in their best interest to invest. If you have researched the fund and decide independently that it is a good one in which to invest, the fee saving could be worthwhile. |
Read also: How do I measure costs on my unit trust fund?
