All you need to know about investment fees and costs

R5 billion flowed into collective investments in South Africa in just three months, according to Asisa stats for the quarter ended 30 September 2024. “Given these numbers, it is clear that the investment industry represents a significant opportunity for advisers,” says Kobus Wentzel, Executive Head of Distribution and Sales at 1Life Insurance. “Those who are new to the industry need to be aware of the different fees and costs associated with investments, and how advisers can earn a fair fee for their services in this market.” With insights from 1Life Insurance’s LISP partner Wealthport, Wentzel shares the following thoughts on navigating the complex world of investment fees and costs. 

Investment fees are complex but also transparent. There are numerous fees and costs associated with different investments (see below), and different ways of charging and discounting fees. This makes the investment fee world very complex and often difficult to understand. Despite this, there is complete transparency! Investment fees are fully disclosed at point of sale and on investor statements. Advisers need appreciate the complexities of the fee environment, know which fees apply to which investments and explain these in detail to clients, ensuring they understand the impact of fees on performance. 

Advisers need to decide how they will earn an income when advising on investments, including which fees to charge and which fees to discount. Advisers can choose to earn an income on fees paid to investment managers such as upfront fees and trail fees. These fees are easy to levy as there is no additional charge to investors (the fee is deducted from the amount invested), and payment is made from investment manager to adviser. Or, they can charge clients directly such as a percentage of assets under management, time based or subscription fee model, where the client pays adviser directly. Advisers can also use a combination of different models such as trail fees, and hour-based fees for reviews and advice.  

There is no ideal fee model. Charles Brits, Head of Distribution at Wealthport and a certified financial planner, says there is no one perfect fee model. “In the 30 years I have been in the industry I have not seen any FSP find the golden bullet when it comes to fees. There are different ways of charging clients and an argument for different fees in different circumstances.” He uses the example of upfront fees. In some cases, charging an upfront fee that is paid once-off makes sense, fairly compensates the adviser for their services, and ensures they are paid soon after rendering their services, such as some structured products where the upfront fee does not affect the initial investment value. However, in other products an upfront fee may reduce the initial investment value to the detriment of the client.  

Advisers must show how they earn their fee and add value. Advisers need to show what services they offer such as investment research and analysis, regular client updates, meetings, as well as regular communications and newsletters. Those who take the time to explain fees and offer regular engagements and investment updates, will be well compensated without arguments. In addition, advisers need to be able to compare fees of different products on a like for like basis, including DIY platforms, and show where they add value that an investor cannot get elsewhere. 

Clients who work with advisers on their investment portfolios have higher returns. Morningstar found that good advice can generate 29% more income for a retiree and asset manager Russell Investments put the value of good advice at over 3% of assets under management. Advisers help clients make informed decisions, set realistic investment objectives, negotiate favourable fees, and perhaps most importantly – stay invested and avoid making bad money decisions such as the panic sell based when markets fall. For example, at the start of the COVID-19 pandemic, markets lost around 20% of their value in a short time, and then more. Many investors would have been tempted to sell, some did. Clients whose advisers kept them informed, updated and advised them to stay invested benefited from the market rally that followed. 

Your product providers will have details on the fees for each of their products. Advisers should always ask what fees apply and how they are calculated, if fees can be discounted, which fees are negotiable and by how much, if sliding scales apply, details of how fees are charged, and how fee-related calculations are performed. For example, ask the product provider to explain in detail how percentages are calculated such as the effect of fees on the investment return. Your clients will ask about this! If performance fees are charged know the watermarks or benchmarks and when the performance fee kicks in. Spend time learning about this in advance and you and your clients won’t have nasty fee surprises in the future.  

Different fees include: 

• Admin and/or platform fees
• Investment fees
• Upfront fees
• Advice fee
• Trail fee
• Commission
• Performance fee
• Switching fees
• Discretionary Fund Management (DFM) fees  

A fair fee for a professional service 

“A fair fee is one that reflects the value you provide to the client,” says Brits. Work with product providers and clients so you know which fees apply and how you will earn a fee for your services in this market.