RA costs and client interests

 by Patrick Cairns

Last year ASISA took a big step with the introduction of the Estimated Annual Cost (EAC) standard. Its implementation in the RA space has been particularly significant, as there have been concerns for a long time around the costs of these products, particularly those offered by insurers. In theory, the EAC standard allows for a direct comparison between these and those offered by low-cost passive providers and asset managers.

To judge how these different options stacked up, we asked for quotes from a number of providers for what it would cost to invest R5 000 per month into their RAs. We assumed maximum up-front fees to the adviser and ongoing advice fees of 0.57% (0.5% before VAT). The investment would be split equally between two underlying multi asset high equity funds – one being the provider’s own in-house product, and the other the Coronation Balanced Plus Fund.

Although not all providers gave figures over all time periods, the table below shows the results:

Impact of charges over
1 Year 3 Years 5 Years 10 Years 25 Years
Provider A 6.2% 5.3% 5.2% 2.1%
Provider B 22.6%* 14.3% 9.4% 2.7%
Provider C 5.5% 5.2% 4.1% 2.6%
Provider D 8.9% 5.2% 4.4% 3.3%
Provider E 9.5% 5.1% 4.1% 2.9%
Provider F 8.9% 4.6% 3.7% 2.6%
Provider G 8.9% 4.7% 3.7% 3.0%

*Assumes the full investment made at the start of the year.

This paints an interesting picture, but it also doesn’t paint the whole picture. While the EAC has created some simplification, there are still a lot of variables at play.

For instance, these all factor in the initial advice fee. If that is stripped out and the adviser is paid directly by the client, the figures will obviously look quite different. On the Provider F product, for example, the EAC would be 2.3% through the entire life of the product.

EACs are also much lower if one uses only low-cost, passive in-house funds. The table below shows how three different options compare:

Impact of charges over
1 Year 3 Years 5 Years 10 Years 25 Years
Provider I 3.1% 2.2% 2.2% 2.2% 1.6%
Provider J 4.4% 4.1% 3.0% 1.4%
Provider K 1.8% 1.6%

The options offered by the insurers on this table are clearly very competitive, if they are held to term. This shows some of the nuances in this space.

One does however have to ask what one is getting when paying the extra fees in first table. The first is active asset management, although how exactly one calculates this value is unclear when you cannot predict future returns. It’s even possible that actively-managed funds could under-perform the low-cost passive options, which would mean paying a double cost.

Some new products from the insurers also have other built in features such as bonuses and guarantees. Others will continue to pay the monthly contributions if the member is disabled. Some of these can be factored into the EAC, but others can’t. How does an adviser attribute value to them?

Some would say that these complexities only add to the argument for using the more simple investment-linked products where what the client is paying and what they are getting are more straightforward. The flexibility of being able to stop or reduce contributions without penalty is also a big factor.

And if that’s the case, it may even be possible for advisers to provide clients with even more cost-effective solutions. Those clients with a big enough book may be able to get preferential administration rates from product platform providers like Stanlib, Momentum or Allan Gray due to the way the administration fee is structured on these platforms.
Gradidge-Mahura Investments, for example, has been able to offer clients an RA with an underlying investment into funds like the Satrix Balanced Index Fund and Nedgroup Investments Core Diversified Fund at just 0.5% before advice fees. Even adding in an active component would keep the cost under 1.0%, which is a pretty compelling offering.

Note: One has to wonder to what extent higher commission on the old-style products, coupled with higher fees for the product providers, still play a significant role in which products are punted to clients without any real concern about what the best option for the client would be.

Then there is of course the fact that a large percentage of RAs are either reduced or made paid-up long before the original term. There can clearly only be one winner here as far as client outcomes are concerned.

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