In this episode of Honest Money, Warren Ingram delves into the often-confusing world of Unit Trust Fees and Administration Costs. Warren clarifies the differences between Total Investment Charge (TIC) and Administration Fees, and their impact on your investments, the merits of using a separate money market account versus an income fund for managing fees, and dissect the various elements of TIC.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
In this episode of Honest Money, Warren Ingram delves into the often-confusing world of Unit Trust Fees and Administration Costs. Warren clarifies the differences between Total Investment Charge (TIC) and Administration Fees, and their impact on your investments, the merits of using a separate money market account versus an income fund for managing fees, and dissect the various elements of TIC.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Welcome to Honest Money, your best guide to financial freedom. I'm Warringgrim, the author of a few best-selling books, and I'm also an award-winning financial planner, and I've helped thousands of people on their journey to financial freedom. I'm not here to tell you what to do, but I am here to share my experience and the best ideas that I've learnt, and I hope these ideas help you on your journey to financial freedom. Welcome to Honest Money. We received a listener's question from Sean and it's a little bit complicated, but I think it's an issue that a lot of people are dealing with, so I thought it was worth just expanding the question and then getting into the answer. So Sean has a range of different unit trusts and he uses an investment platform as an administrator for those unit trusts and what he's finding is that he thinks that the way that the fees are explained to him are opaque and complicated. So there's kind of two sets of fees. So there is the TIC, which is called the Total Investment Charge, and then the Administration Fees, and he's saying it feels to him like those fees are kind of continuously being deducted and in his analogies it's like stripping the parts from the car while it's driving. Eventually you'll have no car left because all the parts are being stripped. And then his question follows up to say perhaps it's better to set up a separate kind of a money market account or a fee account and then make sure that all your fees are deducted from that so that your underlying funds can actually continue to grow without paying those fees. So let's get into it.
Speaker 1:I think just to explain the difference firstly, so the charges that you see for unit trusts, called TIC, total Investment Charge, those are for unit trusts only. So, for example, if you've got an investment platform and that's company A and you use company A's platform but you buy company B, c, d, e, f and G's funds, then two sets of people or two sets of companies need to be paid. So firstly you need to pay the administration fees to company A, because they're doing the administration and custodianship of your assets, and then you need to pay the fund managers from B onwards to actually manage your money in those funds that you've selected. So a total investment charge is then typically being paid only to the fund managers. So that's not. It doesn't have actually anything to do with your administration platform. That's simply the fund costs for being in a unit trust and a total investment charge will be made up of a few different fees. So it will be the fee that you pay the fund manager, and that's typically just a fund annual fee, asset management fee or annual management fee. And then there are some other charges. So you're paying the custodian of the unit trust, so that's typically a bank and it's separate from the fund manager. You're paying transaction charges, which are the charges levied by the stock brokers when your fund manager is buying or selling the underlying shares, bonds or other investment instruments. And then there will be things like audit fees and the like. So your total investment charge.
Speaker 1:It is a few layers of fees, but the idea is that that you as an investor have a very good idea of all the charges that you're paying for that fund that you've got, and some funds will also have a performance fee, and so your TRC could vary quite widely. So you might find some funds where in a year you're paying 0.5% TRC because there was no performance, the fund did badly, whatever the deal is and in the same fund a year later you're suddenly paying 2%, and then you're wondering why on earth your fees gone up four times in size. And that will be because of the performance fee. So just understand that your annual management fee, which is a component of your TRC. If there is a performance fee as part of that, you could be in for a wild ride when things are going well in that fund. The administration fee, then, is a completely separate thing. So that will be something that you'll see disclosed on your statements. Usually you'll see it as a percentage, but you'll also see it as a monthly fee. So what will happen is that actually deduct some of the money from your underlying funds and charge it to you as a random amount. So, for example, you might see a transaction value of $0.22 in a month and it's called administration and that is the fee that you're paying to your fund administrator. So that's the company that's putting all of your other unit trusts together, consolidating everything and then holding those funds on your behalf, keeping all of the records and providing you tax reports on an annual basis. So there are two separate things.
Speaker 1:I'm not convinced anymore, sean, to your question that they're opaque and difficult or they're trying to be. You know, hide the fees from you. I think the unit trust industry and the platform industry in South Africa is working quite hard to actually get you know, make the investments more transparent, and so there might be a bit of confusion as to why the two. But it's probably confusion because they're working to transparency rather than to being opaque and hiding things from you. But you need to understand that there are two parties in the mix. You know, if you want to set a separate fee account for your administration fees, that's possible. So if you're going to do that, my suggestion is to use, you know, a money market fund or an income fund for those fees, so you can say to your overall administrator that you want all of the administration fees to be deducted from one fund specifically and that then doesn't sell units and other funds. And the reason why I suggest a money market or income fund is that it's very unlikely that your money market fund will go down in value, so it's a bit more stable and predictable. Yes, the returns won't be so good, but when you're deducting fees on a monthly basis, you don't want to sell out of the fund that's just gone down by a lot and then you sell out at a very low value, and so you know many market fund. You know at least it won't go down and you will earn some interest. But I guess it's worth pointing out that if you're earning interest there might be some income tax implications to the interest. But that's possibly the route to follow.
Speaker 1:I'm not too worried usually for myself when I'm paying administration fees from my underlying funds. I don't separate that out into and then have a fee fund only because I don't really want to sit on too much cash. So I'm happy to have a very long-term focus where you know my portfolio will go up and down as markets shift, but over time I'm anticipating that you know the growth will be higher than the fees, and so if there are a few months in a year where the growth is less than the fees, I factor that into my long-term calculations. So I'm not a big fan of that. But I know a lot of you know people like having their fees deducted from one place only and you know maybe that's a bit of preference that you can select. So I'm sure I'm not going to kind of I am sitting on the fence a bit because I think it's a little bit about preference and what you want.
Speaker 1:But secondly, just making sure then that your cash account you know your money market account for the fees isn't too high so that your whole portfolio now becomes, you know, overbalanced to cash and, you know, then you sacrifice a bit of growth. I thank you for the question because I think a lot of people will focus on that. I think it is important to look at your fees and make sure that they are reasonable, you know, and if the fees are high in your portfolio, especially the TIC, you know it might be worth changing the funds that you own and making sure that you consolidate as much as you can on administration platforms, because one of the things we know about administration platforms is the more money you allocate to them, the lower your overall admin fees get. So they are incentivizing you to combine your assets and build them up at one place. And I think, you know, administration platforms do add value, because it's a nightmare doing tax reports and trying to keep a track of everything that you've got, especially when you've got local and global investments.
Speaker 1:But then you need to pay for that and you want to pay as little as possible, but make sure that you're paying a good administrator to deliver good service. You know, one of the things I've noticed in South Africa is that some of the good administrators from a decade ago are now pathetic and have cost a fortune and lost time trying to chase up and make sure that their admin works. And that can be really expensive when they mess up your tax reports, for example, and source charges, your penalties etc. So make sure you choose a good administrator. I pay those admin fees with a bit of a smile because I know what that admin looks like and I don't want that to kind of repeat on me into the future, but it is very much a choice. So if you don't like the admin fees, you can always go direct to the underlying unit trust companies but then know that you've got five funds and that means five times the admin that you need to keep track on. I hope that helps you and thank you for your questions.