Growth plan makes swopping funds easier
Linked products have competitive advantages, writes LEIGH ROBERTS
Estimates are that a staggering 70% of the annual inflow into the unit trust industry is routed through linked-product companies.
A linked-product company sells packaged investments - the distinguishing factor of their products is that the underlying investment is in unit trust funds. An investor can choose the individual funds he wants to invest in.
The quick growth of this market is due in part to the marketing tactics of the companies - financial advisers often get free overseas trips as sales incentives. To be fair, though, linked products do have competitive advantages.
The linked-product range includes traditional investments like retirement annuities, provident funds and living annuities.
The biggest-selling linked product, however, is the "growth plan". This product poses a serious option for any investor who either already owns a suite of unit trusts or plans to invest a sizeable sum in unit trusts.
The choice for investors is whether to invest directly in unit trust funds or to route investments in funds through a growth plan. A growth plan merely houses unit trust investments.
The prime advantage of going the growth plan route is that you can switch between unit trust funds at a much lower cost than by buying and selling unit trusts directly.
An investor would want to swop funds if he is unhappy with a fund's performance, or if he feels another fund would better suit his changed investment needs, for instance moving into a low-risk fund in the years nearing retirement.
The cost of switching between funds within a linked product is generally 0.25% plus the usual 0.75% compulsory charge of the fund you buy into. Compare this with up to 5.75% you could pay when buying units in the conventional way.
The ease of investment management afforded by a linked product may, however, prove to be the biggest risk to investors. You could lose money by selling one fund to buy into the wrong fund at the wrong time.
The potential profit to be had from switching must be high enough to cover the cost. This requires a knowledge of financial markets or, at the very least, the help of a qualified financial adviser whose opinion is backed by sound research.
Costs are another consideration. Entry costs can be cheaper in a growth plan, although fees vary greatly in the industry: on buying a plan you can pay on average 5.5%, compared with up to 5.75% for a direct unit trust purchase (excluding VAT).
A linked company can undercut entry fees as it negotiates a lower upfront cost with the funds and then pockets the difference.
But investors pay an extra 1% each year for the privilege of investing through a growth plan. This is in addition to the annual service fee of around 1% of most equity unit trust funds.
The extra fee covers administration costs and the ongoing advice and service from your financial adviser. Advisers are incentivised to look after you beyond the time of selling the product and grabbing the upfront portion of commission, by earning a further commission of 0.5% each year.
If you are unhappy with the advice or service from your adviser you can take your business elsewhere.
So which investors are best suited to a growth plan?
Sound advice comes from Jakes den Haan, managing director of Standard Bank Investment Administration Services: "If you want to invest in a unit trust and hold onto your investment for a long time, a growth plan will not have much appeal.
''If you want to manage your investment and switch between funds then the potentially higher returns you can earn from switching will more than offset the extra annual charge."
Bernard Futter of portfolio managers Incorporated Securities says: "The biggest advantage to investors with existing unit trusts, is the cost-effectiveness of transferring a number of under-performing funds into a growth plan and then switching into better-performing funds. This transfer is free with some of the linked-product companies."
The smaller investor who invests a few hundred rands into unit trusts each month should stick to direct investment, says Futter. "The growth plan is ideally suited to investors with existing funds or who have a lump sum in excess of R30 000 to invest."
Investors have another option: if you switch between funds within the same management company you generally do not pay a fee. But bear in mind that no management company can outperform the rest over time, and this increases the overall risk of your portfolio.