Unit trust annual management fees have been on an upward spiral since they were de-regulated in 1998 - exacerbating the current under-performance of funds.
Recent research by Profile Media, a publisher of unit trust handbooks, shows that annual charges have increased by an average of 20 percent since 1998.
The research also shows that the total entry costs (initial charges and compulsory charges) on all funds have on average dropped by four percent since 1997.
However, the increase in annual charges more than out-balances the reduction in initial costs.
Nic Oldert, the managing director of Profile Media, says investors are not always aware of the effect fees have on their investments.
If returns are 15 to 20 percent, then a cost of one or two percent does not make much difference, but at a return of seven percent or less, a one- or two-percent annual fee becomes significant, Oldert says.
The average increase in annual charges would have been bigger if unit trust management companies had not been prevented from automatically increasing annual management fees for then existing unit holders.
The biggest jump - 120 percent - in annual management fees was in the general equity sector.
The most recent official Association of Unit Trusts data shows that only three out of 25 domestic equity general funds beat their benchmark of the JSE Securities Ex-change's All Share Index (Alsi) over a three-year period.
In other words, investors are having to pay more for poor performance.
The top fund delivered a 6.54 percent a year return and the worst return was -13.51 percent over the three years to March 31 2001. The Alsi grew by 5.18 percent on average a year.
Profile Media's research shows that in 1997 the maximum annual fee was one percent and is now 2.2 percent - a 120 percent increase. The minimum annual fee in 1997 was 0.5 percent and the minimum today is zero.
The most expensive funds on annual management fees today are Liberty's RSA Equity and RSA Small Cap funds, which charge 2.5 percent a year.
A total of nine funds charge the next most expensive annual management fee of 2.28 percent. These high-cost funds include Investec, m Cubed Capital, Old Mutual, Sanlam and Standard Bank funds.
Money market and index funds charge the lowest annual management fees. Standard Bank Index fund does not charge an annual management fee at all, but instead charges a higher upfront fee (5.5 percent) than the other index funds.
Generally, index funds have lower initial and lower management fees than other types of unit trust funds because these funds track an index and do not require the research and management of actively managed funds. On average, you will pay 4.44 percent in initial fees and 0.79 percent in annual management fees for these funds.
The most expensive entry cost today is 5.75 percent and the cheapest is 0.6 percent - most funds (a total of 222), however, have an initial charge of 5.5 percent.
Commissions to brokers have on average decreased since 1997 by just over seven percent. The maximum commission paid by most funds to brokers is three percent, excluding VAT.
Oldert says despite the increases unit trusts are still fairly priced. Investors who buy directly from unit trust management companies will pay between 0.5 and 1.5 percent in annual charges, which, Oldert says, is "pretty reasonable for professional management of assets".
Investors who buy their unit trusts via discount online brokers - like Fundsnet (an Old Mutual initiative) or Equinox - pay very low initial fees, making annual costs the most important consideration for investors.
The big pitfall for investors is the double layer of charges you have to pay when you invest via a linked investment services company (Lisp) or wrap fund.
While the Lisps and wrap funds are quite transparent about the fees they charge investors, many of them take for granted that investors understand that each unit trust fund in which the Lisps or wrap fund invests on your behalf also charge fees.
Remember to negotiate the best deal for yourself. Most unit trust companies have a tiered fee structure. So the more you invest, the less you pay in fees.
Standard Bank Index Fund 0 Investec Index Fund 0.4 Liberty Alsi 40 Tracker Fund (C Class) 0.48 Futuregrowth Winter FoF 0.57 Coronation Alsi 40 Tracker Fund 0.57 Fedsure Index Fund 0.57 *Fees are expressed as percentage of the investment (including VAT)
- Administration fees, which are charged by the unit trust company;
- Commission collected by the company and paid to the intermediary or broker who placed your investment; and
- Compulsory charges: In an equity fund, the compulsory charges include brokerage paid to the stockbrokers, who are instructed by the fund manager to buy shares, and marketable securities tax.
- Annual management fee: The unit trust company charges this fee for administering your investments from year to year. It is deducted from the fund at the end of each month;
- Performance fees: Some companies charge these fees. You are charged a percentage of the performance of your investment. Performance fees may be included in the annual management fee; and
- Trail fees: Some companies charge you trail fees, which are paid out annually to intermediaries so that they can provide you with on-going advice about your investments. This fee may also be included in the annual management fee.
Some funds waive the entry fees, or charge you a reduced entry fee, but ask you for an exit fee instead. The exit fee is based on your original capital as well as the growth on your investments. You only pay exit fees when you sell your investment. Typically, the percentage you pay is higher if you sell in a shorter period of time and may even fall away after a period of, for instance, five years.
In April last year different classes of funds were introduced. The class the fund is in determines the annual management fees a unit trust company can charge and follows the deregulation of charges in 1998.
class unit trusts are the older funds that have operated with regulated annual fees. These funds can only change their fees after a ballot of the fund's unit holders.
class unit trusts are aimed at individual investors and have unregulated service fees, which means the management company can set its own annual management fees. The company can change its fee structure but has to give you three months' notice.
class funds are aimed at institutional investors who invest large sums of money and generally offer lower fees because of the volumes of investments that are made.
class funds are also aimed at institutional investors, but will fall away soon.