“Never invest in an Investment you can’t understand.” and “Beware of Geeks bearing formulas.”
Warren Buffett

Harbour Wealth clients may have already noticed a new acronym floating around the financial services space – EAC! At first glance it may look like another convoluted formula, designed to pull the wool over our eyes. It is, however, anything but that and goes a long way in helping clients, and in turn their advisors, arrive at the most informed decision possible.
Leon Campher, Chief Executive of ASISA (Association for Savings & Investments SA), has described it as a world first. EAC stands for Effective Annual Cost measure and has been formulated to provide a standardised way of understanding accurately, exactly what one will pay, regardless of the institution/investment being considered. This measure will not replace other disclosure requirements, so it will stand to merely bolster transparency for both clients and advisors.

EAC Composition

All charges that an investor incurs and will incur need to be accounted for. These values need to be expressed as a percentage and will comprise of the following four components, all of which Harbour Wealth clients will be aware of already:

  • Investment/Asset Management Fees
  • Advice Fees
  • Administration/ Platform Fees
  • Any other Fees (such as our CAT II Consulting Fees)

“All charges that an investor incurs and will incur need to be accounted for and disclosed.”

Up until the inception of the standardised EAC formula, it has been virtually impossible for advisors and clients alike, to accurately differentiate between the costs of collective investment schemes (unit trust funds and exchange traded funds, or ETFs) and life assurance investment products.

Roll Out of EAC – Past & Present

The effective date of this new disclosure is the 1st of October 2016 and one should be furnished with the EAC percentage on any new product proposed by a member institution of ASISA after this date. This is all good and well, but what about the plethora of prior products that carry hidden or “implicit” charges, not openly disclosed to clients and advisors?

All existing investments will need to comply over time with this standard as well. This is most welcome as both clients and advisors will be in a better position to accurately review existing investments. The deadlines have been set as follows for existing products:

  • June 1, 2017 for products sold after April 1, 2010;
  • June 1, 2018 for products sold after April 1, 2000 and before April 1, 2010; and
  • June 1, 2019 for products sold before April 1, 2000.

ASISA has stated that the EAC standard will ensure that institutions cannot manipulate or understate costs or use other disclosures to make the fees more opaque.

The Importance of the EAC standard

The annual costs that are levied against a portfolio form the break-even point for each client. The higher the fee, the harder it is to generate meaningful real (above inflation) returns. The introduction and enforcement of the EAC could not have come at a better time; asset managers continue warning us about the many headwinds that face financial markets, resulting in “lower for longer” expected investment returns. We do not expect to see over the next decade, the type of returns we have seen over the last, making each client’s total cost an absolute priority.

The ability to accurately compare the costs of an investment, will allow for far greater competition amongst institutions, and ultimately lead to further downward pressure on fees and costs across the board. Harbour Wealth is proud to already be at the forefront of this new standard and welcomes the material improvements that this will have on the South African market. As all our clients’ are well aware, we at Harbour Wealth take fee reduction very seriously! Unfortunately, we have witnessed many times the damage high fees cause to our clients’ capital invested over time. You want your returns to compound, not your fees!

‘We do not expect to see over the next decade, the type of returns we have seen over the last, making each client’s total cost an absolute priority.’

About the Author and latest Member of the Harbour Family

Duncan Wilson is a well-respected CFP® professional and has been a member of the Financial Planning Institute of Southern Africa [FPI] since 2009. Having completed his BCom (Honours) degree at Rhodes University, Duncan worked for leading financial advisory businesses both locally and abroad, before finally joining Harbour Advisory. Duncan brings with him a wealth of knowledge, expertise and a well-established client base and is based in Port Elizabeth. He will continue building the Harbour business throughout the Eastern Cape and the Garden Route. While he is passionate about his clients and the business, he takes time out to enjoy Golf, Rugby and Fishing.