| Most of us have probably come across asset management fees in one way shape or form, and let’s face it is another of those ‘grudge purchases’ that we try and do away with or minimize as much as we can. Ironically, this distaste has not gone unnoticed in investments, and has led to the huge popularity of low fee ETFs and trackers (but they are somewhat higher in RSA, due in the main to (the lack of) critical mass. Just as a quick refresher – the main asset classes are Stocks, Bonds, Money Market, Property, Commodities and more recently Crypto. These asset classes are replicated by country and currency – bringing a whole new element of risk and volatility (that we Saffers are all too familiar with).  Equities or shares are generally bought through stockbrokers. The movies portray this industry as fast pace and sexy but in reality it’s mundane with real chances to lose money through misdeals. Bond traders, going back in one way shape or form probably millennia, were the more-boring-than-bankers characters – but they too have been living in interesting times. Money-market (call, 30-day, one year call etc) is something most of us are familiar with, and probably where our investment journeys started with a bank. Property used to be the real bricks and mortar – but the advent of REITS – Real Estate Investment Trusts changed all that. Commodities and crytpo are also now available as ETFs without the need to hold the physical asset. All of the asset classes bring something different to the table. They often have different economic cycles – sometimes counter-cyclical to each other, but sometimes dancing to their own tune (the commodity super-cycle for example).  So how do you blend these asset classes to optimise your portfolio? Unit trusts are the most obvious – and one of the main reasons they were introduced – it was a de facto democratization of investments so that individuals could benefit from a diversified portfolio without owning all the shares (in other words, not just for the wealthy). Today you can own fractional shares on some platforms – but unit trusts (or collective investments/ mutual funds as they are called elsewhere) and ETFs are the easiest way to do that. Unit trusts that call themselves ‘balanced’ often have this sort of blend of assets. You might get a unit trust that achieves the same mix or balance by bundling a bunch of other unit trusts together and calling itself a Fund of Funds (FOF). Just a word of warning, a FOF could have hidden expenses that are not transparent. Each unit trust has an expense attached to it – shown in the fund fact sheet or minimum disclosure document – and in a FOF each underlying fund has its own fee attached – which will be disclosed, but the other fees for the wrapped up unit trusts may not. Some advisors may put together a ‘managed portfolio’ made up of Unit Trusts specializing in each of the asset classes, but these have to be switched around every few months to keep the ratios right – and that may trigger CGT. ETFs and trackers usually track an underlying index which can expose an investor to concentration risk if a grouping of companies or a single company is large enough to skew the whole index. Clearly most back end trading for an ETF is done by computers these days – as there is no need for human intervention in a passive tracker of an index(which is why the fees are so low).  To get the right level of diversification for you is the job of your Planner or Advisor. There are numerous variables that go into deciding the right mix for a client. Among other considerations your planner will look at is age, marital status, dependents, future liabilities, risks, tax status, when and if they want to retire (years to retirement) the objective of the investment, the client’s risk appetite, the value and location of other investments, need for liquidity, estate duty implications, potential Situs tax, need for liquidity between spouses, optimization of tax deductions between spouses etc. The ideal way to structure such an investment is with something that is tailor-made (bespoke) but that requires a critical mass (around R5m) that isn’t available to everyone. Even so, your advisor should be able to structure a well-diversified portfolio and keep down the costs. Most independent Advisors have access to lower cost Unit trusts and even ETFs that they can include in your solution ( if that makes sense.) What is a reasonable asset management fee for a Unit Trust? Try and keep it below 1.25%pa, zero upfront fees, and IMHO, steer clear of performance fees. I was once given some very sound advice by one of South Africa’s leading stockbrokers. If you (as a stockbroker or advisor) take credit for the returns on an investment when the market has done all the work – be prepared to take the blame when the market does the opposite. In other words – it is the market that is giving you the returns, the skill of a multi-asset class manager and advisor is to understand the vagaries of each asset class and blend those assets so that over the timeframe chosen, the investment objective can be achieved.  The third part of this success formula is a client that understands what the plan is, and is prepared to stick to it. An advisor can only help you look after an investment, the ongoing income and consumption that builds that wealth is up to you, the client. In simple terms, prior to retirement it is usually a client’s responsibility making sure that new funds keep coming into the investment to build the wealth, after retirement it’s keeping the income required (in other words the consumption) steady and to plan. The advisor steers this ship, making adjustments for changing economic winds, tax obstacles, regulatory changes in the current – so that the investment isn’t adrift in the wide ocean. You know what they say about dead fish (they are the only ones who go with the flow). Articles and Blogs: Should you change your investments with changing politics? NEW Taking a holistic view of your wealth Why do I need a financial advisor ? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |