Shareholders who are unhappy with the costs associated with Strate should consider the upside of being part of the electronic settlement system.
Fees are a contentious issue, particularly for those obliged to pay them. There has been a degree of controversy over the charges levied against private clients since the introduction of Strate, which requires shareholders to exchange physical share certificates for an electronic entry in the central depository via either a central securities depository participant (usually a bank or transfer secretary) or a stockbroker.
Many individual shareholders have embraced the new world order of electronic settlement and the efficiency that it offers. Many have also accepted that a stockbroker is entitled to charge an "administrative fee" or, as it is sometimes more euphemistically called, a "safe custody fee". It is undeniable that holding a stockbroking account attracts many hidden costs. The broker is charged a fee by the JSE for the compulsory use of its accounting system; there is a custodial charge from the central securities depository participant; there are Strate fees, considerable postage and stationery costs and a plethora of other core costs that are entrenched because of legislative, compliance, corporate governance and surveillance requirements.
Then there are those who resist the change and cling on to their old share certificates, kicking and screaming against the system. They are faced with long delays when they eventually want to sell the shares, which have first to be dematerialised. Then accounts that comply with the Financial Intelligence Centre Act must be opened with a broker. Very often the client does not even know the exact number of shares he or she holds because of the impact of past corporate actions and black economic empowerment buy-backs.
The classic example is Absa. Barclays acquired a stake in Absa and all shareholders were obliged to sell back a portion of their shares. Those who still hold the original certificates and send them in for dematerialising complain that they now hold fewer shares than they surrendered.
However, many clients find the very idea of paying a fee repugnant as there were no costs associated with holding share certificates under the old regime. They cannot see why they should now have to pay for a service they were forced into with the advent of Strate.
The old paper-based share certificates resulted in a very slow and inefficient settlement system that was creaking at the foundations because the volumes were too great for it to handle. That resulted in dividends and other entitlement claims not being registered timeously in the name of the purchaser, and slow settlement. All these handicaps are now fading into the annals of history as investors have grown accustomed to the new, highly efficient and effectively regulated trading and settlement environment.
Wearing two hats, one as a stockbroker and the other as a minority shareholder, I have sympathy for the point of view of both the investor and the service provider. It is clear to me that the broker does offer a service that incurs unavoidable costs. This is compounded by the number of very small accounts that arose from the dematerialisation process, drawing into Strate the many people who hold shares in one or two companies. The initial public offerings of Iscor and Sasol, then the demutualisation of the building societies and Old Mutual and Sanlam have added to the large number of small, inactive shareholders.
Investors really have four options:
- Pay the fee.
- Find a service provider that does not charge a fee. The only one I know is Computershare, which offers an own-name service that is paid for by the companies in which you have invested.
- Sell the shares, close the account and transfer the investment to a cheaper option, such as a unit trust.
- Continue holding the physical share certificates and paying no fee. This just postpones the pain of dematerialisation to your executor and heirs.
Fees are a horrible niggle that cause a great deal of irritation. Don't allow the issue of fees to cloud your investment objectives. Keep your reaction in proportion to the fee and remember the principle that a worker is worthy of his or her wage. But the main point is that you do have options, and it behoves you to apply your mind in exercising them.
- David Sylvester is the chairman of the Shareholders' Association, telephone (021) 686 7567.
This article was first published in Personal Finance magazine, 3th Quarter 2006. See what's in our latest issue