PF

Illustration: Colin Daniel

 

High investment costs are one of the causes of poor investment returns – not a reason to justify poor returns.

Unfortunately, this approach happens all too often. What makes it worse is that some sectors of the industry, particularly the life assurance industry, not only have high costs but they camouflage those costs in the multitude of ways they declare them, using an array of percentage amounts and rand amounts.

In our front-page report today, Personal Finance deals with a general downward rerating of investment markets for the next 10 years. If costs are then maintained at high levels, it makes it all the more difficult to achieve your savings targets, particularly over the long term.

And all too often you only discover the impact of things such as high costs and poor asset management when it is too late.

This message is getting through to some players, particularly in the collective investment schemes (unit trust) industry, where there is a lot more transparency than in the life industry. For example, initial costs have virtually disappeared. This is not to say unit trust companies are guilt free. They have introduced performance fees in most cases on top of annual asset management fees.

A normal asset management fee based on a percentage of assets under management is already a performance fee. If the asset management is good, the value of the assets grows and the fee earned goes up correspondingly.

Introducing a “performance” fee on top is simply double-charging for the same thing. If asset managers were honest about performance fees, they would have the same scale in reverse, paying you back money on the same basis if they do not achieve the fund benchmark. Some may reduce fees on bad performance, but none work it on a rand-for-rand basis.

Coronation, which was the source of the front page report today, has and is reducing some of its fees on some of its funds – a good thing, and hopefully this example will be followed by others.

If costs do not come down and predictions of a downward rerating of investment market performance prove to be true, there are going to be a lot of dissatisfied investors.

How the life industry treats its customers when it comes to costs continues to puzzle me.

I was shocked this week by some of the details relating to a determination by Elmarie de la Rey, the acting Pension Funds Adjudicator, on a complaint about investment performance provided by Momentum.

It was not the determination I found shocking, but two elements of the adjudication, namely:

* One of the justifications of the perceived under-performance provided by an unnamed independent actuary consulted by the adjudicator was: “The complainant has not made any allowance for the costs of running the policy.”

My question is: why should the complainant take the costs into account? When people invest money, they do so to get an above- inflation return after all expenses and tax. Otherwise, why invest the money in the first place – to provide extravagant pensions for life assurance executives?

The complainant, MHS, had his complaint about investment performance dismissed by the adjudicator for a number of reasons, including the fact that his calculations on returns on his retirement annuity (RA) policy were not accurate.

He did, in fact, receive an above-inflation, but not great, return of 1.67 percent a year before he transferred his RA from Momentum to Allan Gray in January 2007.

He invested R8 643 in 1985 and received R77 681 on the date of transfer in 2007.

De la Rey determined that “no fault can be attributed to (Momentum) and the perceived under-performance of the investment can only be attributed to the type of product in which the complainant was invested”.

* An attempt by Momentum to argue that the adjudicator did not have the powers to make a decision on whether performance was good or bad because the underlying investment of the RA was a life assurance policy. Effectively, De la Rey ignored this argument by appointing the independent actuary to assess the performance. I simply do not understand why Momentum and other life companies try to limit an examination of the performance they provide to investors. Do they have something to hide? If they have nothing to hide, they should welcome an investigation, particularly when the complaint is rejected, as happened in this case.

Personal Finance has received a number of complaints from Momentum policyholders about investment performance.

There seems to be a problem that needs to be addressed, and part of the problem no doubt lies in the cost structures of Momentum’s investment products.

It is probably the high cost structures that are the reason the life industry resists declaring its costs in a way that everyone can understand. After much pressure a few years ago, it dropped its phoney benefit illustrations and replaced them with something called a reduction in yield (RiY). This is the percentage by which your returns will be reduced by costs annually. The only problem is that the RiY does not include all the costs, and a percentage is pretty meaningless for most people because they cannot see the actual effect of the costs in advance.

The more meaningful way is for all costs at every level of the investment to be included in the RiY, and the RiY should then be used to calculate, on predetermined assumptions, the effect of the costs on the maturity value of your investment, both in percentages and in rand terms. This is known as a reduction in maturity yield.

This will show you how much less you would receive because of costs. This does not mean that there should be no costs. It means you will be better able to compare costs and make a more considered decision on where to invest your money.

In fact, what you should do when getting advice from a financial adviser is insist that he or she provides you with information about the reduction in maturity yields before you sign anything.