Long Term Insurance|Life Insurance|Life Cover

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Unit Trusts * Collective Investments * Unit trust fees

Artickle from: Mike Ronald, an investment professional at Marriott Asset Management, unpacks the various unit trust fees and gives investors a few tips…

There are three different charges which investors may incur when buying unit trusts/collective investment schemes.

If the investments are purchased directly from the manager there are two fees payable:

An entry fee: variously called "initial charges" or "transaction fee", which is a once off fee when the units are first purchased.
An annual fee: also called a "manager’s fee" or "service fee", which is charged annually as a percentage of the value of the investment and is paid by the fund from its portfolio rather than charged individually against the client’s account.
This charge then has the effect of reducing the price of the portfolio and is normally accrued every day. These fees can be a flat fee or a fee dependent upon the performance of the portfolio. The extent of this latter fee, sometimes called a performance fee, is not immediately obvious and would only be quantified by reference to the marketing material of the fund or the fund’s TER (total expense ratio). This can result in an investor not realising the full extent of the fees being paid.

In addition to these two, charges can be levied by an intermediary if the investment is not purchased directly from the manager. These also take the form of entry fees and annual fees. Sometimes these are not part of the pricing of the product and hence the client would notice payment of these fees either from their capital or the income earned from the investment.

On top of this, financial advisors can also levy fees. There is a small move in South Africa for financial advisors to charge fees based on a visit or per hour basis and to move away from those levied as a percentage of the asset size. This has the effect of the client being charged based on effort rather than a standard fee which is charged whether the financial advisor continues to offer service to the client or not.

Investors are becoming more mindful of charges for various financial services products, but they may not be aware of the fees being charged as they are built into the products. The fees get paid by the initial investment amount as opposed to being paid by another payment from the investor.

Some collective investment schemes pay annual fees from the income account of the product. This can be applied to fees levied either by the asset manager or the financial advisor and has the effect of reducing that income and thus the yield in the product.

My top tips for investors to assess the fees they pay on financial products would be:

Read the small print
Reconcile the amount you have invested with what it is worth now, taking into account roughly what markets have done. Any large negative variance may well be the effects of hidden charges.
Get your financial advisor to commit to writing the total charges related to the product

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Estate Duty Act Changes

Changes to the Estate Duty Act this year could change the landscape of life insurance options. According to global audit and advisory firm, Grant Thornton, you may no longer have the best policy to suit your needs and could be paying far more than you need to.

Previously, R3.5 million was left either to a trust or to a child in order for the deceased to take advantage of the R3.5 million estate duty abatement offered by SARS. The remainder of the estate was then left to the surviving spouse as this portion did not attract estate duty.

“The amendments to the Act mean that, in effect, the estate of the surviving spouse can use a tax free deduction of up to R7 million on death. For certain individuals this negates the need for trusts that are expensive to run,” says Brett van Vuuren, Risk Specialist at Grant Thornton Financial Services Cape Town.

Previously, there was a need to have life insurance that covered estate duty for both spouses, as no one knew which spouse would pass away first. This way of covering both lives for the estate duty is quite costly as both lives need to be insured.

The change in the way estate duty is levied means that a spouse can leave his/her entire estate to the surviving spouse (thereby not attracting any estate duty), and the surviving spouse will now get R7 million as the estate duty abatement on their death. In light of these changes, there is a far more affordable option for life cover.

Called the Last Survivor Death Benefit, it provides payment on the death of the last survivor of two insured lives. This allows both partners to be covered by one policy and provides for estate duty liability to be deferred until the death of the last person.

In other words, two lives are insured, but the benefit only pays out after both of the lives assured have died.

“This is not a well-known benefit, but is far more affordable than regular life insurance policies,” says van Vuuren.

In addition to low management fees, the premiums are also about 70% lower than individual life insurance policies and no premium is payable after the first person dies.

For example (see figure 1), an average couple paying R608 a month for normal life cover could save R431 per month (or R5172 per year) in insurance premiums by switching to the Last Survivor Death Benefit.

“The cost savings are substantial” says van Vuuren. “While it may not suit everyone, due to the changes in estate duty law, we recommend that you speak to your financial advisor to figure out the most affordable policy to suit your needs.”

Figure 1: Example of cost saving of regular life cover versus Last Survivor Death Benefit:

Both John and Jane are university graduates, non-smokers and 50 years old.

1. Normal life insurance of R1,000,000