The Hidden Cost of Traditional Fund Structures

TLDR: Most South African investors have no idea what they're actually paying in fees. Unit trust charges, platform fees, advisor commissions, fund-of-funds layers, stack them together and you could be losing 2-4% of your wealth every year. Over 40 years, that's the difference between R3.2 million and R1.4 million on the same investment. This guide breaks down the five layers of fees hiding in traditional investment structures and shows you how to find out what you're really paying.

Here's something that might make you uncomfortable: you're probably paying more for your investments than you think.

Not because anyone is cheating you. The fees are disclosed, technically. But they're spread across so many layers, in so many documents, using so much jargon, that most people never add them up.

A unit trust charges one fee. The platform charges another. Your retirement annuity wrapper adds a third. Your financial advisor takes a fourth. And if you're in a fund of funds or multi-manager structure, there's a whole extra layer you might not even know exists.

Each fee looks reasonable on its own. But stack them together and you could be paying 2-3% or more every year. Over a 30-year investment horizon, that's not a rounding error. It's the difference between a comfortable retirement and a compromised one.

The layers of fees most investors don't see

Let's break down what you're actually paying when you invest through traditional structures in South Africa.

Layer 1: The fund management fee

This is the fee charged by whoever manages the underlying investments. For an actively managed equity unit trust, this is typically 1.0-1.8% per year. For passive index funds or ETFs, it's much lower: 0.1-0.5%.

This fee is usually expressed as the Total Expense Ratio (TER) or Total Investment Charge (TIC). Every fund is required to disclose it, so it's the most visible cost.

But it's just the start.

Layer 2: The platform or administration fee

Most retail investors don't buy funds directly. They access them through a platform (called a LISP in South Africa) or a product wrapper like a retirement annuity, tax-free savings account, or endowment.

These platforms charge their own fees, typically 0.5% plus VAT (0.58%) for amounts under R1 million. Some platforms reduce this for larger balances, but most retail investors pay the full amount.

So now you're at 1.5-2.3% before we've even talked about advice.

Layer 3: Financial advisor fees

If you work with a financial advisor, they charge fees too. This might be:

• A percentage of assets under management (commonly 0.5-1.0% per year)

• An upfront commission (still common on some products)

• A flat fee for advice (increasingly common but still rare)

The advisor fee is often deducted automatically from your investment, so you don't see it leave your bank account. It just appears as slightly lower returns.

According to Smart About Money, the disadvantage of percentage-based fees is that you could end up paying far more than the advice is worth, especially as your portfolio grows.

Now we're potentially at 2-3% per year.

Layer 4: The fund-of-funds layer

Here's where it gets really expensive, and where many investors have no idea what they're paying.

If you're invested in a multi-manager fund or fund of funds, there are two layers of management fees: the fee charged by the multi-manager for selecting and overseeing funds, plus the fees charged by each underlying fund they invest in.

Fund of funds structures typically add 0.5-1.0% on top of the underlying fund costs. Some multi-managers negotiate lower fees due to scale, but the double-layer structure is inherent.

Many investors in retirement funds or unit trusts have no idea they're in a fund-of-funds structure. They see one product name, assume one fee, and never realise there's a whole second layer.

Layer 5: Performance fees

Some funds charge performance fees on top of their base management fee. These kick in when the fund beats a benchmark or achieves a certain return.

Performance fees can be substantial. The Allan Gray-Orbis Global Balanced Feeder Fund had a total expense ratio of 6.17% in one year, with 5% of that being performance fees alone.

Performance fees are included in TER disclosures, but because they vary year to year, investors often don't anticipate them.

Adding it all up: what are you actually paying?

Let's do the maths for a typical South African retail investor:

The Association for Savings and Investment South Africa (ASISA) introduced the Effective Annual Cost (EAC) standard to help investors see the total picture. But many investors still don't check it, and not all products make it easy to find.

Why this matters: the compounding cost of fees

Fees compound against you, just like returns compound for you.

Here's a concrete example from 10X Investments:

If you're a mid-career professional paying 2.8% in annual fees on your retirement annuity, that "modest percentage" could cost you over R800,000 by the time you retire.

According to Treasury research on retirement fund charges, fees compound significantly over time. Studies show that paying just 1% less in annual fees over a 40-year period can result in substantially more wealth at retirement. Depending on your starting capital, we're talking hundreds of thousands of rands more.

Let me make that concrete:

The difference between 1% and 3% in fees isn't 2% of your money. It's more than half your final wealth.

This is what 10X means when they say fees are "the hidden tax devouring your retirement annuity." You don't notice the extraction because it happens before you see your returns. Your statement shows growth, so everything seems fine. But you're growing slower than you should be.

The fee paradox: expensive doesn't mean better

You might assume that higher fees buy better performance. Pay more, get more. That's how most things work.

Investment management doesn't work that way.

According to analysis from Stellenbosch Business School, there's limited evidence that higher-fee active managers consistently outperform lower-fee alternatives after costs.

Here's the maths that matters: if Fund A delivers 11% gross returns but charges 3% in fees, your net return is 8%. If Fund B delivers 10% gross returns but charges 1% in fees, your net return is 9%. Fund B's inferior gross performance delivers better outcomes for you.

Some high-fee managers do outperform. Allan Gray and Coronation have historically beaten benchmarks by enough to justify their fees, according to some analyses. But picking which active managers will outperform in the future is extremely difficult. Past performance, as they say, is not a guarantee.

For many investors, the safer bet is simply paying less.

What you can do about it

You're not stuck with expensive fee structures. Here's what you can do:

1. Know your total cost

Ask your advisor or platform for your Effective Annual Cost (EAC). This single number should include all layers of fees. If they can't tell you, that's a red flag.

According to Discovery, the EAC gives you a single, comparable figure you can use across providers.

2. Consider low-cost alternatives

Index funds and ETFs charge a fraction of what active managers charge. The ETFSA platform offers retirement annuities with ETFs as underlying investments. Sygnia, 10X, and others offer low-cost options.

According to GoFreedom, platform fees for unit trusts are generally around 0.58%, but if you combine this with a low-cost index fund (0.1-0.5%), your total cost can be under 1%.

3. Question the fund-of-funds structure

If you're in a multi-manager or fund-of-funds product, ask whether the extra layer of fees is justified. Sometimes it is (genuine diversification benefits, access to managers you couldn't access directly). Often it isn't.

4. Reconsider percentage-based advice fees

A 1% annual advice fee on a R5 million portfolio is R50,000 per year. Every year. For the same advice you got when your portfolio was R500,000 and you paid R5,000.

Some advisors now offer flat fees for financial planning. Doshguide is a platform that connects investors with fee-based advisors. Consider whether you need ongoing advice or just occasional planning.

5. Consolidate where possible

Multiple products with multiple providers means multiple sets of fees. Consolidating to a single platform can sometimes reduce costs, particularly administration fees that have minimum charges.

A note on the fee conversation

Let me be clear: fees aren't inherently bad. Good advice is worth paying for. Active management can add value. Administration platforms provide genuine services.

The problem is when investors don't know what they're paying, can't compare alternatives, and end up in expensive structures by default rather than choice.

The financial services industry has historically benefited from this opacity. Fees were buried in documents most people never read, expressed in percentages that sounded small, and deducted before investors saw their returns. The ASISA EAC standard has helped, but awareness remains low.

Your job as an investor is to ask questions. What am I paying? What am I getting for it? Could I achieve the same outcome for less?

Sometimes the answer is that higher fees are worth it. But you can only make that judgement if you know what the fees actually are.

The bottom line

Traditional investment structures in South Africa layer multiple fees on top of each other: fund management, platform administration, advice, and sometimes fund-of-funds management. Each layer looks reasonable in isolation. Together, they can exceed 3% per year.

Compounded over decades, these fees transfer a significant portion of your wealth from your account to the financial services industry. The difference between paying 1% and 3% annually could be more than half your final retirement balance.

The good news is that low-cost alternatives exist. Index funds, ETFs, and fee-conscious platforms can dramatically reduce what you pay. But you have to seek them out, because the default options are often the expensive ones.

Know what you're paying. Question whether it's worth it. And remember that in investing, the less you pay in fees, the more you keep for yourself.