Honest Money
Honest Money
Simplify and Save: Lowering Fees Through Investment Consolidation
In todays episode Warren Ingram discusses the complexities of investment fees, the importance of selecting the right funds, and how to evaluate the value of financial advisors. He emphasizes the need for transparency in fees, the significance of diversification, and the role of good advisors in making informed investment decisions.
Takeaways
- High investment product fees can be considered immoral.
- Consolidating investments can lead to lower fees and simpler management.
- Diversification in a small market like South Africa may not be effective.
- Good financial advisors can add significant value to your investment strategy.
- Performance fees should only be charged when funds perform well.
- Understanding the components of investment fees is crucial for investors.
- Investors should question their advisors about fund selections and fees.
- A certified financial planner is a key qualification to look for in an advisor.
- Transparency in fee structures is essential for trust in advisor relationships.
- Total investment costs should ideally be below 2.5% for good service.
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The Honest Money podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.
Speaker 2:Hi Warren, thank you so much for your podcast. I've been listening to it for a while and it's been really, really helpful for me. My question is around fees, specifically total fees for a financial advisor and investments. What, in your opinion, is a reasonable, effective annual fee for all my investments the total including fund management admin and advisor fee? I'm looking at getting a financial advisor and I want to try and get the lowest total fee as possible.
Speaker 3:Thank you, thank you so much for your question around fees. I mean, I think, just to talk it through from beginning to end and then to give you an answer. So I think we, you know, from a principal point of view, I've always had a problem around. You know, very expensive investment product fees in South Africa, I think you know, for I mean I've been doing this for nearly 30 years and and a lot of the time in the early days, you know products would cost, you know you know an investor around four or five percent a year. And there are still some retirement annuities and insurance-based products that have those kinds of costs. And for me, when you're paying a product cost alone so forgetting about admin and advice costs but when you're paying 3% a year just for a product, for me it's not legal to say it's daylight robbery. So I can't say that. But what I can say is I think it's almost immoral and so I just don't like those kinds of costs. So I think it's understanding that nowadays a lot of the unit trust companies and exchange-traded fund businesses have reduced their fees substantially. Even the administration fees have come down very significantly. So it feels to me that the product side of the market is becoming more reasonable and the fees are becoming fairer for us as investors. And so I think you know, just to know that, you know, understanding that you know I still don't like paying upfront fees for investments. I don't think that's right, I don't agree with that. Paying upfront fees for investments, I don't think that's right, I don't agree with that. But if you're paying let's say somewhere around 0.2% to 0.5% a year for administration and I'll explain that now and then let's say somewhere up to maybe kind of 1.2%, 1.3% a year for your fund and then somewhere around 0.3% to 1% a year for advice, then I think you're in the game, I think you're in the ballpark. So I'll do a quick sum now to show you how that works.
Speaker 3:But I just want to explain each of those kind of cost components so that you make the right call. So when we're talking about administration, that means that you go to a company that it might sell its own unit trusts, but it also offers an administration service where it will offer other companies unit trusts as well and you can then buy a tax-free savings retirement fund endowment, maybe a local and offshore investments all at one place. So effectively it creates kind of a wholesale platform for you where you get access to a range of different fund managers' products, but you only access them via one place, and so your admin becomes a lot easier, and I like that as a principle. I think it's a very sound thing to do, especially when it comes to tax reporting and all of those things. You just want your life to be simple when you're managing your investments, and nowadays these administration platforms the jargon for those are linked investment service providers, so LISPs is the kind of acronym, and nowadays the acronym, not the acronym the fees have become a lot more reasonable. So you can find that as you consolidate your investments on one platform, on one LISP, you start to, you know in the early days at the smaller amounts. You might be paying 0.5% a year for your administration, but the more money you have with that company, the lower the fees get, and so it pays you to consolidate. You get lower fees but equally your life just gets a heck of a lot simpler.
Speaker 3:So I think you know that's worth considering when you're doing your investments, either through an advisor or direct, it doesn't matter to me, you know, in terms of the consolidation of your investments, but just look at that as part of your decision. So if you're talking to an advisor and they're recommending a platform, just understand what those fees are, because if you're starting with a small amount, then you might be paying 0.5. And then you know, I've just told you that you can get to 0.2, which is true, but 0.2 will be for you know, very large sums of money where you might be counting in the fives or tens of millions of rands. So it might not be that your fee is unfair, it's just that it's smaller. And just understanding that you know it does cost quite a bit of money to open and maintain an account per person, and that's why the fees you know are a little bit higher as a percentage for smaller accounts and get smaller as a percentage for the larger accounts. So firstly, just check that, make sure that you shouldn't be paying more than 0.5% or whatever, including that 0.57% a year for administration, and there should be the capacity for you to reduce that fee as you add more money. And so then you would look at the next thing, which is your fund charges, and I think there it's important to understand what funds are being recommended to you and what the fund costs are per fund.
Speaker 3:So one of the things that advisors do that I don't really love is that they'll, for example, you know, choose four unit trusts and you know, put 25 percent in each and then give that to you. You know, let's say, choose four balanced unit trusts and you know, put 25% in each and then give that to you. You know, let's say, choose four balanced unit trusts and then they'll say to you, here's your portfolio and it's, you know, a quarter, a quarter, a quarter, and it's to all the big, you know kind of most well-known fund managers in South Africa. You know, to me that's not really adding a lot of value, because our stock market is quite small. The number of shares that you can buy is quite limited, and so if you're buying fund manager A's balanced fund and fund manager B, c and D, the likelihood is the one is buying what the other is selling, and if not, then one out of the other two is definitely buying what the other is selling. So, long story short, what happens is you have four balanced funds that together, in your whole portfolio, probably look a lot like the index, but at double or triple the price, and to me that just adds no value to you as an investor.
Speaker 3:What you've ended up doing is getting not diversification but actually diversification. I'm sorry for the dad joke there, but I just think understanding that diversification when you've got multiple funds on a global platform makes a lot of sense because the global markets are enormous. But in South Africa you can't have four balanced funds in one trust portfolio and think that you've got diversification. You don't. The market's just too small. So I think there you know, just understanding what it is that the advisor has recommended for you in your portfolio.
Speaker 3:If they've got a blend of, let's say, some index investments, some general equity investments which are specifically in shares, they've got some cash, they've got some bonds, they've got some global funds in there and they've got it mixed into a blended portfolio, then I think, understanding that you've got quite a few different funds but each of them is doing a specific job, that makes sense to me. So when you look at the costs of your funds that you're going to own, your cash funds will be quite cheap. So for a money market fund you could be paying kind of 0.3% to 0.5% a year, but not too much more than that as far as I'm concerned. And then on the other end of the spectrum, for a general equity fund, so in other words, a fund that invests only in shares, that is actively managed. You could be paying probably around 0.75% to 1.5% a year, and so it's worth just understanding what that cost is and how big that fund will be in your portfolio. So you might find that your most expensive fund might only be 12% or 15% of the portfolio and it's there to do a very specific job. Then that cost might make sense.
Speaker 3:But you don't want to say that I've got the bulk of my money in one very big, very expensive fund and it's charging me 2% a year just to be in the fund. I'm not convinced that that's really fair to you. The only time that I've seen very high performance fees, which are tolerable, will be when a company charges performance fees, and so if your fund that you're buying into has done incredibly well, you might look at the fund cost and the current fees might be very high. But that might be because it's showing you that it's done well and that the clients that are in the fund that have enjoyed the performance are now paying performance fees. If that is the case, you need to do a bit of work with the advisor on what those performance fees are and how they get charged.
Speaker 3:And the reason I say that is you know it's okay to pay a performance fee if you pay no fees when the fund is not doing its job. So if the objective of the fund is to deliver 5% a year above inflation and it's not doing that and they're not charging you anything while they're not delivering performance, that's fair. I think that that makes sense to me. But if they're charging you 1 and a half percent a year, no matter what, and then they're charging you 20% of the extra growth, then that's not fair. So you need to know that in bad times the fund manager is not earning any money and won't earn money until your losses have been recovered. So let's say your investment is doing this and then the markets tank and so you go from 100 down to 50. You shouldn't be paying any fees until the investment has gone from 50 back to 100 and then only paying on the growth from 100 above again. So for me that becomes a fair performance fee.
Speaker 3:But otherwise a flat fee where you just pay a fixed percentage 1% a year, 1.25 or something like that is much more reasonable and fair to me as far as I'm concerned, and then give your advisor kind of a hard time if there's no index tracking in the portfolio, if you've got no access to indexed investments as well. I like blending indexed investments and investments where you're paying a fund manager to try and outperform the market. I think putting the two together makes a lot of sense. And if your advisor is given your portfolio where there's no index tracking, you need to ask them serious questions. You know, because index tracking is cheap. It drops the overall cost of your portfolio and really adds value to you over long periods of time. So that's the fund situation and then the advice fee. Now I mean you need to know always this is honest money, and so you know.
Speaker 3:I think understanding how you pay an advisor is important, and what you get from the advisor is also important. And then do I think advisors add value? I think good advisors add enormous value. I think good advisors add enormous value. I think good advisors if they're the most expensive thing in your portfolio. That makes sense to me, because a good advisor can help you make life-changing decisions that will set you on course or stop you making really bad decisions that could destroy your wealth. And so I know I'm going to be accused of bias, because I've grown up as an advisor only and I know that. But that means I've had an impact, or I've had the chance to see the impact of great advice and I've seen the impact of terrible advice.
Speaker 3:And so just understanding that if your advisor's charging you, let's say, at the max, they shouldn't be charging you more than 1% or, including VAT, 1.15% a year for advice, and if that's half your cost and the rest of the fees between the products and the administration add up to another 1.15, that means you're in for 2.3% a year. Now that will seem expensive and I understand the point, but if your advisor is the one helping you make great decisions and, most importantly, helping you stay invested when markets are falling and staying on course when you become panicky or pessimistic about the state of the world or the country or whatever it is, you will not regret paying a good advisor. So I think it's. I know I'm hedging my bets here by saying a good advisor, because you need to find out the quality of the person you're dealing with to know whether those fees are fair. I just want to stay on that point for a second.
Speaker 3:It's also important to know that your advisor, you know, as your portfolio gets bigger. I think that that makes a lot of sense, and I've seen advice fees dropping down to 0.3% plus VAT for very big clients and for context, very big clients we're talking about. You know 50, 60 million rand. For context, very big clients we're talking about. You know 50, 60 million rand. So it's not that you're going to get. You know, your first million rand is at 1% and then everything else is at 0.3. I don't think good advisors will charge that. It's too cheap and not profitable for them to help you, and so you know, just understanding the scale of fees.
Speaker 3:I think also that you know, if your life is very simple and your situation is very simple, there's nothing wrong with paying an advisor for an hour and you know, paying them an hourly fee when you need them and you taking control of your investments if that's what you want to do. So there are options where you don't have to pay an annual fee. You can pay, you know, a once-off or an hourly fee or even just a fee for a plan. I mean, there are ways of paying advisors differently.
Speaker 3:If you want to know how to judge the advisor that you're dealing with, I think the very first thing is ask them if they're a certified financial planner. You know that's the benchmark qualification for advisors in South Africa. It's part of a global organization and it doesn't mean that if they are a certified financial planner that they're immediately high quality, but it just tells you that they're in the game, that they know they've done the qualification, they've written a board exam, which is not easy. They're spending a lot of money and a lot of time every year on continuing education to stay current, so that's good. And then you want to ask them how they get paid. And if they're fumbling that question, if they're not clear and transparent and explaining it to you in a simple way, then you need to end the meeting because they're embarrassed about their fees or they're going to overcharge you. Either way, I think you want to deal with a professional who's proud of the service that they give you and is happy to charge the fair fee.
Speaker 3:And then, understanding the person's experience over time, you know, I think you know if you're dealing with a very junior advisor that's very young, are they working in collaboration with more experienced advisors, you know? So you're not just dealing with a youngster that might be in their first year in the job and isn't able to help you with experience, you know, because I think experience counts in this game. So I would say that those are probably the main points. And then, equally that you know, just spend a bit of time, you know, on Dr Google, just doing some research on the advisor. You know, understanding where they come from. Are there any? You know bad articles about them. Out there, them out there. Has anyone complained about them? Just read the complaints. Sometimes I'm sure people have complained about me when they say I'm rude, because if you're talking nonsense and you don't listen and you think market timing is the only way to make money, I'm probably gonna tell you that at some point and then you might give me a bad review and I'd be proud of that review.
Speaker 3:So I think, just understanding the person and then, lastly, with your advisor, make sure that you can ask them embarrassing questions. In other words, you shouldn't feel that you're being stupid when you ask a question. They shouldn't humiliate you or condescend to you. You should feel free to say what is a performance fee, what is a unit trust? Or how am I going to grow my money, or what do you do for me? Any question. There should not be embarrassing questions.
Speaker 3:When you're dealing with an advisor because you don't have the knowledge, they need to be able to explain things to you simply, in plain language, in a way that you understand, without being condescending. And if you feel that you can develop a relationship with a person of trust, then you know that you're on your way. But if you feel there's no trust or you're embarrassed to ask them questions that make you feel stupid or they're throwing a lot of jargon at you, choose another advisor. But the CFP professional is the key in all of this. I think that's the ticket to the game.
Speaker 3:So I think, long story short, your total cost should never exceed around two and a half percent a year for advice, admin, fund, platform, all of that stuff together, and the bigger your investments go, the closer the cost should get to 2% and then drop down. You probably will end up one day paying smaller fees when the fund manager costs drop in time, but for now I think below 2% for a good advisor and good funds and good administrations is probably just about right. Thank you so much for your questions. We love your voice notes. Please send them through. If you're embarrassed to send a voice note, then you know, by all means send a WhatsApp message, but for me, I'm always going to give preference to the voice notes, thank you. Thank you very much for your questions and keep listening.
Speaker 1:The Honest Money Podcast is brought to you by Prescient Investment Management. We consider everything to give you the advantage. It's the future of investing. Prescient Investment Management is an authorized FSP.