Unit trusts, along with exchange traded funds (ETFs) such as the Satrix funds, are about the simplest investment vehicle available to investors.
Unit trusts are:
- Comparatively low cost, particularly if you invest directly without the aid of a financial planner. Only ETFs beat unit trusts in costs;
- Transparent, apart from some of the complex performance fees that are starting to be introduced;
- Well regulated by the Financial Services Board under the Collective Investment Schemes Control Act. This is apart from the proliferation of so-called broker funds, where financial advisers are trying to take a double bite of the cherry by pretending to be unit trust fund asset managers. This simply involves an extra layer of costs and very little, if any, additional expertise.
- Investments that provide a wide choice from market-sector to risk-profiled funds; and
- Flexible, in that you can increase, decrease, stop payments and withdraw your savings without confiscatory penalties.
Worrying trends
What is worrisome is that, increasingly, various product providers, namely life assurance companies and linked product service providers (Lisps), claim to be selling you unit trusts with all the advantages of unit trust funds.
The problem is they are and they are not. You need to understand exactly what is happening if you are not going to be taken on a high-cost investment ride:
- Life assurance companies sell life assurance products, such as endowment policies and retirement annuity funds, that offer an array of underlying investment choices.
These can range from a managed portfolio offered by the life assurance company itself, through to any number of unit trust funds offered by its associated unit trust company or a selection of funds offered by other unit trust companies.
You must be aware that, when you choose unit trust funds as your underlying investments, you are paying the unit trust costs (albeit often at a lower cost than you would pay if you invested in the fund directly) but you are paying the high costs of life assurance policies accompanied by a lack of flexibility. (If you want flexibility, you will be charged extra.) If you alter your premiums, or stop paying, you will be socked with penalties of up to 35 percent.
With a number of policies you are able to switch the underlying investments without being hit with penalties, but there will be a switching fee of about 0.25 percent of the value of the investment.
The important thing to take into account is that life assurance companies will offer guarantees but, again, at an additional cost.
- Lisps allow you to invest in a wide range of mainly unit trust funds. Again, the underlying costs of the unit trust are probably lower than if you went direct (through a financial adviser) but, with the additional Lisp costs, you will pay more.
For the extra cost, a Lisp provides you with a single, consolidated statement for all your unit trust funds and the ability to switch between funds.
The advantage of a Lisp over a life assurance company is that you can reduce the amount you invest and withdraw your investments without any penalty. But if you do not want or need the ability to switch you don't need a Lisp and the additional cost.
Incidentally, most unit trust management companies allow you to switch for nothing between their own funds.
- The combination products. There are a number of products out there that are part Lisp and part life assurance. The product is Lisp-based but the costs are life assurance costs, particularly the commissions paid to sell you the product.
So, in a nutshell, if a financial adviser says he or she is selling you a unit trust product, ensure that you are getting a unit trust product and not something more complex offering you services you do not require at decidedly higher costs.
Remember that there are still too many financial advisers out there (despite the requirement of the Financial Advisory and Intermediary Services Act, that you be sold appropriate products) driven by the commissions they receive rather than your best interests. Unfortunately, many of them are registered Financial Service Providers.
And, remember, commissions are negotiable, although some product floggers try to fool you into believing they are not. Your best bet is to negotiate the payment of a fee for advice.
That way you will know there is no perverse incentive for an adviser to encourage you to sign up for a high-commission product with the commission based on a percentage of your assets. After all, when you go to a doctor or a lawyer you do not pay a fee based on a percentage of your income.