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Opinion

New effective annual cost standard from ASISA

James George, Compliance Manager, Compli-Serve SA
Sept. 15, 2016, midnight
662

Word count: 616

With less than a month to go before they have to disclose an Effective Annual Cost (EAC) on quotes for savings and investment products, product providers are no doubt scrambling to get their calculations done and their point of sale documentation updated. The deadline is October 1 to comply. 

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With less than a month to go before they have to disclose an Effective Annual Cost (EAC) on quotes for savings and investment products, product providers are no doubt scrambling to get their calculations done and their point of sale documentation updated. The deadline is October 1 to comply. 

EAC is another step forward in the fulfilment of the Financial Services Board’s Treating Customers Fairly six outcomes framework. It allows investors, and their advisers, to compare charges across different retail investment products, for example unit trusts and life insurance policies. It also allows them to look at the impact of any charges on investment performance.  According to ASISA, it is likely a world first in its comparative scope and cost transparency.  

For years, the South African savings industry operated in silos along product lines, with each silo developing its own methods of calculating and disclosing costs.  In the case of the collective investments industry, the total expense ratio has become the standard for cost disclosure, while in the long term insurance industry the reduction in yield (RIY) calculation is the norm.  

The new EAC disclosure does not replace TERs or the RIY calculation.  It is a further measure, aimed at helping investors and their advisers compare charges on most retail products and their impact on returns, across the various regulatory wrappers.  In short, it attempts to enable everyone to compare apples with apples, at least as far as costs go. 

While the new EAC standard does not come with a compliance requirement for IFAs, it is still important to understand the standard, and what providers’ obligations are.  For example:

  • A provider must ensure that all the values used in calculations are accurate and comprehensive, and that its calculations are accurate.
  • Importantly, a provider must insure that the values underlying the calculation don’t inflate the financial product or make a product appear less expensive.
  • If buying a particular product means an investor will forego any benefits, this must be disclosed.

The standard applies to all local CIS (including foreign CIS approved by the Financial Services Board for marketing in South Africa), contracts issued under a LISP license, all long-term insurance savings contracts (including endowments and living annuities), as well as retirement annuity funds and preservation funds.    

The standard comprises four different ‘buckets’ if you will, into which various charges are allocated.  They are:

  • 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 – a 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

The EAC is calculated separately for each of the buckets in isolation and then added together to reach the EAC for the product as a whole.  ASISA makes the point in its literature that the EAC in no way compares product features. 

From an advice point of view, it’s clear that different financial products have different uses for different needs.  Depending on the wrapper, they also have different tax implications, all of which advisers need to, and do, take into account when advising their clients. 

But with the strong focus on fees and their effect on returns, in both the media and by Treasury and the Regulator, investors are more aware of fees than ever before.  Advisers will need to be able to explain the EAC of the products they propose to their clients, and be ready to answer their questions.

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