What Are You Paying For?
The subject of fees
The subject of fees has always been debated and even fiercely negotiated between role players in the financial services industry. In this article we will be painting the picture from an angle that we believe investors miss sometimes. To put everything in context we will cover the different components of the total fee investors pay initially and also list the fees normally associated with each service.
The summary above gives the full fee picture in the world of an investor. The total ongoing fee charged can therefore be anything between 2-2.5% pa.
The justification of advice, admin and asset management fees needs to be decided by the investor and can only be based on the question if value is added to the investor’s life or not. For example: If you want to invest without investment advice you will end up going without an administration platform as well as they deal with financial advisors and not investors directly. This means that you will have to deal with asset managers directly and if you want to diversify you will have to deal with each asset manager individually and also receive reporting statements from every manager individually. All that is certainly possible, however the question is whether or not an investor has the required skills and expertise to construct his own portfolio and actively manage it within boundaries of legislation; for example:
- Will the investor be able to interact with asset managers and will managers be willing to see individual investors on a quarterly basis to discuss matters in the fund?
- Will the investor have the needed skills to do market research on a daily basis and translate that research into his investment decision making process?
- Will the investor have enough time to deal with the administration of the investment and also fulfil all auditing functions surrounding interest and dividend payments and the collection thereof and account all that for tax purposes?
If the answer for the above questions is no, we suspect that such an investor will need advice and admin support which comes at an ongoing total fee of 2-2.5% per annum.
Is the fee you pay an investment or a liability?
Fees are mostly seen as a liability but we believe investors should rather determine what the return on their fee investment was over a meaningful time period. To illustrate the point we will create two scenarios. The first scenario is based on an investment made on the 1st of July 2010 in a moderate to aggressive portfolio consisting of asset managers selected by Salvo Capital. The investment was priced at 2.5% per annum to include all services as discussed above. The second scenario is based on an investment made on the same day in a moderate to aggressive fund with one manager which will be represented by the average manager index in the moderate to aggressive category. The investment was priced at 1% per annum as the investor invested directly with the asset manager.
There is value in a fee based investment given that it is accompanied with a proper advice and management process. To determine what the value of your fee based investment was, one should consider if the additional fees paid was compensated with additional returns. The examples above illustrate that scenario 1 outperformed scenario 2 with 1.63% and the additional cost involved to produce the additional return was 1.5%. If the additional cost is seen as an investment it can be said that the return on the 1.5% fee investment was a handsome 1.63% which amounts to a return of 106% on your fee based investment. This example is based on cold and unemotional numbers and additional value relating to diversification, lower volatility and increased consistency as a result of the management process and all administrational duties that comes with an investment was not included in the “value added for money paid exercise”.
The fees paid by our clients are for active management and ongoing support relating to investments in good and bad times. We therefore believe that the fees that clients pay towards the management of their investments should always be justified with a reasonable return measured over a reasonable time period. It is ultimately the investor’s privilege to choose if the value proposition of outsourcing management and administration is worth the investment or not. We believe our value proposition will stand this test.