Issue: June - Aug 2013
FEES & COMMISSIONS
Don’t prevaricate. Negotiate.
Trustees must play their part in helping to reduce costs that significantly impact on the net returns of retirement-fund members. Here’s a checklist* of what’s negotiable.
No matter how authoritative and well-meaning the intentions of a service provider, trustees are entitled press for the best deals. They must do so, to be satisfied that they really are helping their members, looking particularly at:
- Risk benefits such as death and disability cover. These have a commission component built into the premiums. These commissions must always be disclosed when the quotes are delivered to trustees who should then discuss the commission amount; the larger,
the greater the scope for negotiation. While there’s a widely-used group commission table that’s standard, commission payable can vary from 7,5% of premiums for a small scheme down to 1% for a large scheme. Trustees should get the service provider to explain the value added by higher commission. They should also insist that the annual rand amount
is quoted in terms of legislative requirements;
- The alternative to being charged commission is that the trustees negotiate a fee for the broking service carried out, or that this service be included in the retainer fee with no commission payable;
- An area of concern expressed by National Treasury is when a member retires and has
to purchase an annuity. While trustees usually don’t get involved in the affairs of a member after a claim arises, commissions might still be paid with no benefit to the member.
It’s worse when the commission is payable annually without intervention usually from the broker being paid the commission. Trustees could ensure that the member is provided with professional financial advice at retirement so that, by using the marketing power of the fund, the member can negotiate these commissions to more reasonable levels.
- Then there are commissions charged on umbrella funds contributions. These funds generally pay commissions, where brokers are involved, on the group life table. Depending on the size of contributions by an employer, around 5% of the member’s contributions are paid every year to a broker who may not be adding value and may not even be involved at all.
- Members don’t see the asset-management fees when they’re taken off the returns before being accredited to members’ accounts. These fees should be separately disclosed and annually reviewed. In umbrella and in larger standalone retirement funds, as the size of their assets increases the discounts on managing these assets should increase commensurately. Ask whether these discounts are being passed on to members.
- Some asset managers charge performance fees. Find out whether these fees are reasonable by competitive standards, and what happens when there’s underperformance.
- Administration fees can be charged in a number of ways. There’s a need to understand the different charging structures by interrogating these fees and asking important questions e.g. what’s included in the basic fee and what services are additional to it; whether there are charges for any service not expressly specified in the basic fee under the service-level agreement (SLA); if the fund has requirements that are not spelled out in the SLA, what will be the fees for them?
- It sometimes happens that there are errors by the administrator, causing costs to be incurred. The SLA must be checked to cover the question of who’ll pay the costs for rectification.
- The SLA should not have penalty feesfor circumstances where the fund, due to poor service, terminates the agreement. All aspects of the SLA are negotiable. Trustees should not, without checking and questioning, simply sign the drafts submitted by service providers.
- Every service should be backed by an SLA. These agreements must be reviewed annually. Many funds neglect to do this at their peril.
- If a service provider offers advice or intermediary services, it must comply with the Financial Advisory & Intermediary Services (FAIS) Act. If the service provider isn’t compliant, it cannot offer these services and cannot charge the fund for them. This extends from organizations being licensed to consultants being registered under FAIS, easily verifiable by trustees from the website of the Financial Services Board.
- Trustees should annually review all their fund’s fees and, to ensure that competitive rates are being charged, they should be benchmarked against others in the industry.
In essence, trustees are trying to extract optimal returns for their members. Unnecessary, or unnecessarily high, fees and commissions eat into these returns.
* Information kindly supplied by Ian Haigh, formerly of Old Mutual and now with Mvunonala Holdings.