Question:
How do you go about deciding on a pension fund provider? EAC, TER, TIC — it gets confusing. How do you balance fees vs fund performance? Or should you go through an independent broker to get the best deal?
— Jerome H
Answer:
This is an excellent question. When it comes to navigating our investment portfolios, things can get a bit overwhelming. Sometimes fees are misunderstood or incorrectly compared to each other and investors end up opting for ill-managed strategies or mediocre advice. Yes, the fee structure you choose will play an important role in the success of the portfolio over the longer term. But bear in mind that cheaper is also not always better.
Let us start with the fee structures of any portfolio. There are typically a few fees that will always be present. In principle I always recommend working with a wealth platform. Be cautious about using platforms that have penalty structures included — it becomes difficult to move away from such a platform as time passes, and the penalty for doing so becomes larger. Bonus structures are typically also “bought” — I recommend doing a cost analysis before opting for bonus structures.
Fee structures typically include the following:
- Upfront fees: I believe this practice is frowned upon and should not be implemented. Yet many advisers do this.
- Admin fee: This depends on the platform chosen as well as a sliding scale on fund value.
- Advice fee: Negotiable — typically between 0.5% and 1% (VAT excluded).
- TIC stands for total investment cost. This is the fund manager and portfolio strategy chosen and consists of a few underlying building blocks. In principle it will depend on asset classes chosen, active vs passive, and single manager vs multimanager. Cash is, for example, really cheap. Equity exposure and global exposure are more expensive but offer much higher returns.
- TER refers to total expense ratio. It consists of management fees as well as other costs, excluding transaction costs — those associated with trading the various instruments in the funds.
- EAC is effective annual cost. This is a great concept that was introduced to the industry a few years ago to ensure transparency in fee reporting. It essentially summarises all the underlying fees in the portfolio. It’s a good way to compare apples with apples. Something to take note of, however, is that the TIC (investment manager fees) are mostly but not always already deducted when you refer to the performance shown on a fund fact sheet — so this fee should not be deducted from your return again. Essentially only admin and advice fees still need to be deducted to understand the net effect.
As with anything in life, you essentially buy a service. You need to ensure your fee structure is providing the best advice in the market. That should be holistic advice, including not only suitable investment strategies, but holistically viewing tax optimisation, estate planning, risk planning and the like.
I would do the homework of what the service model includes for the strategy advised: performance (as well as downside protection) within a portfolio; and strategies taken throughout different market and economic cycles.
Fee structures need to be analysed and should be fair. However, be sure to analyse the holistic offering.
— Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch
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