Cut-price unit trusts up for grabs soon
Deregulation of charges will bring the industry in line with international norms, reports LUCIENNE FILD
CHEAPER unit trust funds are in the offing: the industry is about to take the first step in deregulating the fees charged to investors.
No-load funds and discount brokerages are common overseas, but local investors have had no choice but to buy unit trusts at set fees.
This week, the unit trust advisory committee (which includes industry members and the Financial Services Board) met secretly to discuss the thorny issue of deregulation. Well-placed sources say the committee has come out in favour of deregulation - provided the unit trust industry agrees to the disclosure of all charges.
Phil Erasmus of the Financial Services Board says once the industry is deregulated charges will be determined jointly by a fund's trustees and its management company - the aim being to allow the market to determine the charges levied on investors.
Deregulation will allow a fund flexibility in deciding how and when to levy charges. At present, funds are compelled to charge an up-front compulsory fee (about 1%) and an initial fee (maximum 5.46%), and an annual service fee (maximum 1.14%).
Deregulation not only opens the door to variable rates for these charges, but also to more flexibility - for example, making it possible to swap the initial fee for an exit fee (payable on selling units).
It also opens the door to no-load funds where the investor does not incur any charge other than the annual service fee, and buys and sells units at the selling price.
Association of Unit Trusts deputy chairman Phillip Scheel says the industry is pushing for deregulation "because this is the cornerstone of a free market enterprise". He says existing legislation prohibits the levying of exit charges, a common practice overseas, and that deregulation will change the way charges are recovered, with certain charges being deducted from the fund itself.
A great benefit of deregulation to investors will be the scrapping of the iniquitous industry practice where the investor, generally, pays the same commission (up to 3%) when buying units from a broker as he does when purchasing units directly from the fund's management company. This practice came about because management companies were reluctant to annoy the brokers, who sell most of their units.
An industry source said the practice was "an absolute disgrace" and that it would be the first to be scrapped come deregulation. If an investor buys directly from the management company, and thus foregoes the advice of a broker, he should be entitled to save on the commission charge, but this does not happen.
And unless you have a large sum to invest (usually more than R50 000), you are unlikely to be able to negotiate a discount on the commission charge.
A strong impetus to the industry's move to deregulation is the threat to local management companies posed by overseas unit trust funds which are expected to storm the local market when foreign exchange regulations are relaxed in July.
Scheel says it's far easier for foreign management companies to offer discounts because legislation in their countries allows funds to recover most of their operating costs from their income.
Internationally, the annual service fee is not regulated and some funds charge as much as 1.75%. (This higher charge enables foreign funds to pay brokers quarterly trailer fees - basically incentives not to switch the investor to another fund - and is a practice which local management companies are likely to dread.)
Initial and exit fees are also not regulated overseas, although legislation usually stipulates that certain investor charges are disclosed.
Professor Hugo Lamprechts of Pretoria University's Business School says local management companies have not been lenient as far as discounting is concerned, but this will quickly change when overseas funds enter the market.
At present local investors have access to only two funds which charge only an annual service fee: Prestasie SA Tracker and Standard Bank Extra Income. And there's only one discount broker, Internet-based Unit Trusts of SA, which offers commission discounts - but only for April.