Cost structures may vary from one fund manager to the next. Hence it is imperative for an individual investor to carefully assess the costs. What are some of the associated costs of investing in unit trusts?
- Initial fees: Certain fund manager may opt to charge their fees upfront. These fees are at times referred to as the “front-end” fee. Investors may need to fully understand this layer of charge if applicable.
- Brokers Fees/Commissions: These fees may be incurred to investment advisors or any broker that might have been used to facilitate the client onboarding process. However, under any given scenario, broker fees/commissions must be explicitly approved by the client. In short, commissions must be fully disclosed, and are inherently negotiable, and must be agreed between client and advisor.
- Annual Service Fees: These are charged by the manager or management company for asset management and related services. These are expressed as a percentage of the funds under management. Annual Service fees have a cap of 5% per annum at any given point in time. Management fees are quoted as an annual percentage, but in practice they are recovered monthly or even daily by the fund. A portfolio with a net asset value of K1Billion, for example, and an annual service fee of 1% is entitled to recover K10m per annum in fees. Given that portfolio values change daily, however, the manager may opt to recover 1/365 per day, based on the daily valuation. This amounts to around K27, 397.26 per day on a portfolio of K1 Billion.
- Performance Fees: These are designed to motivate fund managers to focus on fund performance rather than inflows. Computing performance fees can be complex, and care must be taken when looking at performance fees to see if they are fair on investors.
NB: Any fees incurred must be reasonably disclosed to clients.