Understanding the ‘effective annual cost’

Understanding the ‘effective annual cost’

By Megan Kritzinger, 27 Nov 2017

In November 2017 we made changes to the Nedgroup Investments secure online site to provide for an additional disclosure tool around charges that an investor will likely incur in purchasing a Nedgroup Investments financial product. This additional cost disclosure is required by the ASISA Standard on Effective Annual Cost (EAC), which was developed to assist investors and financial planners to compare charges on most retail investment products.

The Standard was introduced in October 2016 to create a uniform disclosure methodology which enables investors and advisors to compare different financial products and foster a more transparent approach to cost disclosure across the industry. Previously, different disclosure methodologies used by the financial services industry included ‘total investment charges’ (the total expense ratio and underlying transaction costs), which is typically a retrospective measure used CIS companies, while Life companies used the reduction in yield methodology, which is more forward-looking. EAC is also forward-looking as it designed to illustrate the costs you can expect to incur based on the investments you have.   EAC is also forward-looking as it designed to illustrate the costs you can expect to incur based on investments you have.

Why is it important for you to know your EAC?

The EAC calculator allows you compare charges on different types of financial products and understand the impact they have on investment returns. This means that you are placed in a better position to make informed decisions around both new and existing savings and investment product choices. By combining all the costs you are likely to incur into one table it helps you understand and visualise the total impact. More specific to the advice charges – EAC allows you to understand the difference between various levels of ongoing and initial charge values over the shorter (1-year) and longer (10-year) term.

Different funds (equity vs. cash vs. balanced) also have different levels of investment charges and EAC combines your product portfolio to enable you to see what the overall cost is based on the amount you invest in each fund.

There are four components which make up EAC. These are:  

  • Investment management charges – this includes all fees related to the management of the fund like asset management fee, brokerage, audit and custody fees (known as total investment charges on the minimum disclosure document).
  • Advice charges – these are initial ongoing and/or advice fees as agreed between you and your financial planner.
  • Administration fees – this includes additional administration fees applicable to certain products like a life policy – but not applicable to Nedgroup Investments since none of our products charge a separate and additional administration fee.
  • Other charges – this would include things like exit penalties – but again, not applicable to Nedgroup Investments products, so it is not included on our table.

These components are then added together (per product type) in one table to get the EAC for the financial product as a whole. These charges are shown over a forward-looking 1, 3, 5 or 10-year period which cannot be adjusted. While the EAC will reflect the charges that may likely be incurred, the actual impact of charges may vary depending on market performance and whether any future withdrawals, additions or switches are made.

So why does the EAC still reflect initial advice fees after the first year?

EAC illustrates to you as an investor what the impact of your initial fee is today if you stretch it over the longer term. It is almost like saying you are buying a TV today at an initial cost of R10 000, BUT over 3 years it technically only costs you R3 333 per year; over 5 years the cost of having access to my TV daily it works out to R 2 000 per year and over the 10 year time period that you will own it. It is like paying R1 000 per year for it.

EAC as part of your online transaction process

While we already have an EAC calculator on our public website aimed at new investors or existing investors who want to calculate the EAC for a new investment in isolation of their existing investment, we have introduced an additional EAC calculator on our secure site. The new EAC calculator allows you to calculate your EAC on an existing Nedgroup Investments product which will include existing investment values, previously set up debit orders and recurring withdrawals, in addition to:

  • New investments
  • Additional investments - into an existing product through either a lump sum or increase in recurring debit order
  • Switches - from an existing fund to an existing fund or a new fund
  • Changes of annual financial planner fees and initial financial planner fees on debit orders

We have also included the EAC table as part of the online transacting process. This means that just prior to you confirming your online transaction, the EAC table will appear and which we hope will assist you in understanding the effective annual cost of all your investment accounts impacted by the transaction.

 

 

 

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