If you have been following the financial media, you will have read about low-fee asset manager Sygnia’s recent run-in with the Advertising Regulatory Board (ARB) on the effect of fees on investment outcomes. One could say that both sides are right – and wrong – depending on how you look at it.
First, let’s consider marketing and advertising generally. Marketing involves highlighting a product’s positive features while possibly downplaying any negatives. Think of an estate agent who advertises an apartment as having a panoramic sea view but fails to mention its poky main bedroom. Or flavoured yoghurts on supermarket shelves that proclaim they are “low-fat” and therefore presumably healthy but, on reading the small print in the nutritional information, you discover they are high in sugar.
Sygnia offers a low-cost retirement annuity (RA). It has a right to market its RA as having lower fees than RAs offered by other providers. Its advert asks the question: “Are you aware that you could be losing as much as 60% of your retirement savings to fees?” This is based on a discussion paper released by National Treasury in 2013, which states: “If the recurring charges deducted from the fund account of a regular saver are reduced from 2.5% to 0.5% of assets each year, he or she would receive a benefit 60% greater at retirement after 40 years, all else being equal.” The assumptions were that the investment would grow at 10% a year, before fees, and contributions would increase by 6% each year.
The ARB directorate argued that there was nothing to show that the charges “were representative of the charges that currently apply to South African RAs”, adding that the 11-year-old hypothetical model was “virtually meaningless”.
I decided to put that statement (and Sygnia’s claim) to the test by surveying RAs currently available to South Africans. I selected five popular RA providers, including Sygnia and another low-fee provider, with their flagship balanced funds as the underlying investments. I then calculated 40-year outcomes based on all fees plus performance using the funds’ annualised five-year returns to the end of March.
The funds are Regulation-28-compliant: they invest within the limits imposed on retirement funds by the Pension Funds Act. They are multi-asset high-equity funds that target long-term growth, with roughly 60% to 70% exposure to equities, local and offshore.
You can apply for any of the RAs directly online, without having to go through a financial adviser, which further brings down costs. For comparison I calculated the outcome on a hypothetical high-fee fund with an additional 1.15% annual adviser fee (see table). All fees include VAT.
I ran into a couple of hurdles, which make it difficult for consumers to compare apples with apples:
1. Some platforms have tiered fee structures, so the more invested, the lower the fees.
2. Unit trust funds have different fee classes, depending on whether they are offered directly to consumers (retail class) or via a platform. This impacts their net performance figures.
The projected 40-year lump-sum figure is purely hypothetical, because in reality investment performance differs from day to day and month to month, although it does smooth out over the long term.
Some observations:
• The balanced funds showed similar performance (between 9% and 10% annualised, net of investment fees), with one outlier, Provider A (10.74%).
• Provider A, because of its superior performance, produced the best outcome, despite being second highest in terms of costs.
• Sygnia came in third, despite having the lowest fees of all five providers.
• Two providers, including Sygnia, do not charge a platform fee, only an investment fee. (This applies only to Sygnia’s unit trusts. Its exchange-traded funds incur a low administration fee.)
• Advice fees ratchet up the costs considerably. The hypothetical high-fee portfolio accessed through a financial adviser, which achieves a similar pre-fee return to most other providers in the table, fares the worst, with less than half the final lump sum of Provider A.
• The ARB was wrong. A two-percentage point difference in fees between providers is certainly possible in the current RA market if you go through an adviser that charges a percentage of assets under management versus investing directly.
• Performance must be taken into consideration. In other words, to refer back to Treasury’s discussion paper, all else (besides fees) is never equal.
Was Sygnia’s ad deceptive? Yes, in that it focuses on costs alone. And the way the 60% difference is phrased in the advert bothers me. “Losing as much as 60% of your retirement savings to fees” does not marry with “Receiving a benefit 60% greater at retirement” in an investment with reduced fees. The ARB picked this up, noting that less financially literate consumers may understand the ad to mean they stand to lose 60% of their capital to fees.
What is not in dispute is that high fees can make a big difference to your final lump sum, and that is clearly shown in the survey by taking the difference between Sygnia’s projected lump sum and the lump sum in the hypothetical high-fee-plus-adviser scenario. Costs are a factor in the mix, but they must be considered in relation to performance. The conundrum is how to gauge performance that hasn’t yet occurred.
* Hesse is the former editor of Personal Finance
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