Hiding fees in plain sight

My most “successful” LinkedIn post this year was a mini-expose of expensive retirement annuity (RA) products.

I got permission from the client to use their detailed reports to show that the useless RA they invested in was still prohibitively expensive, even after they received a “reward/bonus/booster/commission” from the product provider.

Read: Impact of fees on investment income

In this case, the product supplier was a large insurance company.

The hype about fee rebates distracts investors from the fact that net fees are still ridiculously high.

In fact, minus the reward/bonus/booster/commission refund, he was paying almost seven times more than the cheap RA we invested his money in.

No, this is not a typo.

In addition, the funds in the worthless RA were more than 50% more expensive than those in the cheap RA.

A friend (and client) who follows me in LinkedIn and read a post a few days later asking me how come customers don't see that their rates are so high?

When you receive a statement, shouldn't the amount of fees be clearly stated and easy to view?

In fact, this is not true.

Tariffs are disclosed “here” (or there, or somewhere else)

There is another insurer whose reports have a section on fees highlighted in bold.

However, they do not disclose the amount of the commission, but only inform the client where he can go to get information about the commission.

They actually refer customers to a call center, but the details of the call center are a few pages further down.

By introducing additional complexity into the process, they successfully reduce the number of clients who can easily determine what fees are associated with their investments.

We have often had to look up this information for clients who were invested in this product by a previous consultant.

Further intrigue

We also discussed other cases where pricing information is not clearly and simply disclosed to customers.

But it was the role of the financial advisor in all of this that interested my client.

Surely they have to disclose these fees? You can't hide the impact of these fees on revenue? That last question has intrigued me for years.

In the LinkedIn example, the client received over 4% per annum for administration and 2.2% per annum for investment management. I was unable to determine the amount of the consulting fee because it was not disclosed.

However, I was wondering how the minimum 6% annual fee could be hidden, especially in a low yield environment.

The average balanced fund has returned 7.84% per annum (net of investment management fees) over the past seven years and 6.95% per annum over the past 10 years as of June 30, 2024. How can you hide a 4% per annum fee in such an environment?

To deceive the client

On Thursday morning, I was lucky enough to find myself sitting next to an “advisor” talking to a client about his investment (in the same insurance company I wrote about on LinkedIn).

We were at a popular breakfast spot in Sandton. From the discussion, I realized that the client was wondering about the return on his investment.

I watched with interest as the consultant pulled out the fund's information sheet and discussed it with the client.

“As you can see, the fund has returned over 8.5% in the last year and over 8% per annum in the last five years.”

The client picked up the fact sheet to read and seemed pleased with what he saw. Had he looked at the corresponding Morningstar report, he might have had a different opinion, but that's not a problem.

Depending on what product (RA, endowment, preservation fund, etc.) he invested in, he would have to deduct an administrative fee from that satisfactory performance.

By showing only the fund's fact sheet, the consultant cleverly created the illusion of transparency.

Investors can access the fund through several products and even different product providers. The fund fact sheet does not disclose the product administration fee because the fund manager cannot know which product clients will use to access the fund. Different products and different product providers will have different pricing structures.

Read:
Investment Management Fees and Double Dipping
Investment and Operating Fees 101

It is obvious that the regulator [Financial Sector Conduct Authority] In particular, more needs to be done to protect customers.

The regulator could achieve this by insisting that all types of reports clearly disclose returns net of all fees (and simply disclose all fees).

As long as customers have to jump through hoops or rely on salespeople to get information, the system will continue to have high fees.

By the time investors realize the implications of these fees, it may be too late for them to do anything about it.

Read: How much does investment management cost?

Listen to the Money Rules podcast with Boitumelo Ntsoko from Moneyweb (or read the transcript) Here):

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Craig Gradidge, CFP®, is the co-founder of Gradidge-Mahura Investments.

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