Understanding investment fees

The two most popular investment products are unit trusts and exchange-traded funds (ETF). Understanding the difference between these two will help you make cost-effective choices.

Unit Trusts vs. ETFs

When you save or invest your money in a unit trust, you put your money together with other people’s money to buy a small piece of various assets, like shares and property. These funds are managed by investment managers. They often charge higher fees due to them actively trading and making decisions every day.

In an ETF you also invest in various assets, but an ETF typically tracks an existing index on the stock exchange, like the Top 40  (the top 40 companies in South Africa) or the S&P 500 (the top 500 US companies). An ETF mirrors the movement of an index. Less active management is involved , therefore these funds usually have lower or no management fees. There may be brokerage costs (also called transaction costs) when you trade your shares in your ETF.

Let’s look at some of the fees that investment products incur.

1. Management fees
   The investment manager charges this to oversee the investment fund’s assets. They keep track of the various factors (policy, politics, natural disasters) that can influence the movement of the fund’s assets. They aim to optimise the growth of the fund. This fee is expressed as a percentage of the assets under management and can vary from 0.5% to 1%. These percentages might seem small, but they can significantly impact long-term returns.

2. Transaction Costs (TC)
   Every time an asset is bought or sold, costs such as brokerage fees and taxes apply. High trading activity can lead to higher expenses, reducing returns. This can range from 0.08% to 0.9% of the amount you invest and there may be a minimum brokerage fee – anything from one cent to R120.

3. Performance fees
   Most unit trusts and ETFs have a benchmark. A benchmark refers to a standard or reference point against which the fund’s performance is compared. For example, if a fund’s benchmark is the JSE Top 40 Index, the fund manager’s goal is to generate returns higher than this index. If the fund does better than the benchmark, the fund manager might earn a performance fee. 

4. Advisor fees
   Financial advisors also have bills to pay and charge a percentage for their service – it can vary from an additional 0.5% to 1%.

The above are just some of the typical costs involved. In some cases, you also pay administration, platform, exit and upfront fees.

Know your acronyms

By law, investment companies have to be transparent about their fees, but it was not always easy – even for finance people – to figure out exactly what the fees are. To enable investors to compare apples with apples, the Financial Sector Conduct Authority (FSCA) introduced TERs, TCs and TICs. Now all investment companies use these standardised terms to illustrate their costs.