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Cape Town - Consumers and advisers will for the first time be able to compare charges and their impact on investment returns across most savings and investment products from October this year.
All members of the Association for Savings and Investment South Africa (Asisa) are required to adopt the new Asisa Standard on Effective Annual Cost (EAC) from June 1 2016. The first phase, which applies to all new investment applications, must be implemented by October 1 2016.
Asisa represents the majority of South Africa’s asset managers, collective investment scheme management companies, linked investment service providers (LISPs), multi-managers, and life insurance companies. The EAC Standard will apply to the majority of products offered by these companies.
According to Michael Summerton, convenor of the Asisa EAC Working Group, the Standard is most likely a world first in its comparative scope and cost transparency. Summerton emphasised that the EAC Standard facilitates cost comparison only, and does not provide any insights into the differences in product features.
The EAC Standard facilitates a standardised approach to cost disclosure by product providers that consumers and advisers can use to compare charges in a meaningful way irrespective of whether the product is a unit trust, a living annuity, a retirement annuity or an endowment policy.
According to Summerton, this will enable consumers to make more informed decisions when choosing savings and investment products.
The EAC standard requires product providers to disclose four separate components of charges (including VAT), and perform the EAC calculations assuming that an investor terminates the investment at the end of specific time periods that must be shown in the disclosure table:
- Investment management charges: Costs and charges for the management of all underlying investment portfolios;
- Advice charges: Initial and annual fees, both lump sum and recurring;
- Administration charges: All charges relating to the administration of a financial product;
- Other charges: Catch all for all remaining charges such as termination charges, penalties, loyalty bonuses, guarantees, smoothing or risk benefits, wrap fund charges and risk benefits like waiver of premium.
In terms of the Standard, the EAC must be calculated separately for each of the four components and then totalled to provide one EAC figure for the financial product, expressed as a percentage. The Standard specifies how these costs must be calculated.
All charges that an investor will incur must be included in the EAC measure. Where a charge is not available, a reasonable best-estimate must be used. This must be disclosed.
The Standard strongly cautions product providers against manipulating any values to inflate the projected or anticipated performance of a product or to make a product appear less expensive. It also requires companies to use plain language in their cost disclosure.
