by Lee Khee Chuan. Posted on March 4, 2012, Sunday
Article from Borneo Post Online
If the question above catches your attention, chances are that you are having qualms, like some other investors, about the high upfront cost of investing in unit trusts.
A national English daily highlighted this issue in its business pullout section headlined ‘High fees dampener for unit trust’ on November 12, 2011. It was a well written piece of news report.
This news report started with one Jason Yap, feeling that he already started losing money before he had a chance to make a profit. And what irritated Yap further, who was a retiree, was the high upfront fee he had to endure, and that had a profound impact on the return on his investment.
Some unit trust management companies charge up to 6.5 per cent upfront sales charge for its equity funds when investors invested using cash. The rest usually charge around five per cent, except for money from Employees Provident Fund (EPF) to invest in funds (under the EPF Members Investment Scheme) which was capped at three per cent recently since January 1, 2008.
The news report highlighted that in developed countries like Britain and Australia, there was a regulatory push for such financial products to be delivered on a fee for service basis rather than on a high push environment with upfront sales commissions.
In Britain, the government had legislated that by January 1, 2013, all financial products were not allowed to have commissions attached.
One financial adviser interviewed opined, “I think the upfront fee is too high and eats into the returns of investors. The average compounded rate of return of equity unit trusts in Malaysia over the last 10 years is only about 7.5 per cent per annum, and losing six per cent upfront is too high a cost for investors.”
I was curious about the responses from the unit trust management companies.
Let’s review some of the answers put forward by the top management from the unit trust management companies, as reported in the news report, to see if they made sense.
One of them said the performance of a fund and its relevance to investors was key rather than merely looking at sales charges. At the end of the day, the basic rule of investing was making an informed decision.
This meant investors needed to have sufficient information and knowledge of the product they were investing in.
A second one said any attempt to restructure the front-end and back-end charges would require very careful study and strong will on the part of the authorities to make tough changes to the rules and regulations on existing distribution channels which was dominated by a tied-agency system.
Agent commissions had already been compressed when the EPF capped the maximum service charge at three per cent. This translated to more than 50 per cent reduction in the normal service charge.
The front-end service charge was the primary means of compensating the agents for the service they provided to investors. He estimated the tied agency force to be over 60,000 at the end of last year.
A third one felt that the market should determine the fee structure as ultimately good performance and achieving the investor’s objective were more important.
Lower charges, better returns?
What do you think as an intelligent investor who has to come up with your hard-earned and hard-saved money?
To me, it is simple. Only three things to commend here, firstly, taking all things being equal, ie, irrespective of fund performance, every one per cent sales charge that went to the fund company would reduce the return that could be earned by the investor correspondingly.
So, if you were charged 3.5 per cent lower, in a way it was already a 3.5 per cent return earned before you even started investing. So don’t you think that it made sense to support funds or fund distribution channels that offered you lower upfront sales charge?
Are you getting good value for the fee charged?
Secondly, as an intelligent investor, you must ask do you get the value when you are charged the annual management fee by the fund manager, usually 1.5 per cent to 1.75 per cent per annum for managing your money.
The simple yardstick to measure was that the fund managed by the asset management company should outperform the index that was chosen as a benchmark for the fund. Investors should fire their fund management companies if they could not even bring extra value to the investors.
Ask for the fund fact-sheet from your fund promoter or simply download it from the fund houses’ websites. See diagram A.
Thirdly, you should review what value-added services your present fund sales person was providing you since the present market practice was such that front-end service charge was the primary means of compensating the fund salespersons for the service they provided to investors.
This is a list that you should start asking yourself, as an intelligent investor:
• What method was the fund seller using in helping you invest and manage the downside investment risk, other than the money being diversified in the unit trust fund?
• How regularly did your fund seller monitor your investments?
• What regular reports did you get from your fund seller that could tell you at a glance how your money was doing, as most of the reports or statements by fund companies were unfriendly to investors?
Article from Borneo Post Online
