EFFECTIVE ANNUAL COST DISCLOSURES & OLD MUTUAL INTERNATIONAL INVESTMENT PORTFOLIO+ as at 1 October 2016 FOR FINANCIAL ADVISERS QUESTIONS AND ANSWERS

Transcription

1 EFFECTIVE ANNUAL COST DISCLOSURES & OLD MUTUAL INTERNATIONAL INVESTMENT PORTFOLIO+ as at 1 October 2016 FOR FINANCIAL ADVISERS The Association for Savings & Investments South Africa (ASISA) has committed to operating within the Treating Customers Fairly (TCF) framework. Hence ASISA developed the Effective Annual Cost (EAC) measure to meet Outcomes 1 and 3 of TCF; namely Customers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture ; and Customers are provided with clear information and are kept appropriately informed before, after and during the point of sale. QUESTIONS AND ANSWERS WHAT IS THE EFFECTIVE ANNUAL COST (EAC) MEASURE? The EAC is a standardised disclosure methodology that can be used by investors and advisers to compare charges on most retail investment products and the impact these charges have on investment returns. This can be done across the various regulatory wrappers so that investors are in a position to make more informed decisions around retail savings and investment product choices. It also levels the playing fields for a more transparent and open approach to cost disclosure, which could have the further impact of reducing costs. It does not, however, measure the features of a financial product. It is a measure of the charges an investor could incur when buying or holding a financial product, such as the Old Mutual International Investment Portfolio+ (IP+). WHAT IS THE SCOPE OF THE STANDARD? This Standard applies to participatory interests in collective investment schemes (including foreign collective investment schemes duly approved for marketing in South Africa), contracts under a linked investment services provider license, all insurance contracts (other than pure risk-based insurance contracts) and products wrapped in a life wrapper, and memberships of retirement annuity funds and preservation funds. These are collectively referred to as Financial Products for the purposes of the Standard. Where any other financial products, not falling into the definition of Financial Products above, are made available to retail customers, ASISA members should comply with the provisions of the Standard. HOW WILL THE EAC BE CALCULATED? The EAC will be shown as a table comprising four separate components: Investment management charges; Advice charges; Administration charges; and Other charges. Below is an example of how the table will be represented (please note that the figures are illustrative only). We have used an example based on an IP+ contract of GBP going into a selection of Self Select Funds only, with no upfront commission and a 0.57% Investment Review Fee. Compulsory Text: The Effective Annual Cost (EAC) is a measure which has been introduced to allow you to compare the charges you incur and their impact on investment returns when you invest in different Financial Products. It is expressed as an annualised percentage. The EAC is made up of four charges, which are added together, as shown in the table below. Some of the charges may vary, depending on your investment period. The EAC calculation assumes that you terminate your investment in the Investment Portfolio+ at the end of the relevant periods shown in the table.

2 Charges 1 Yr 3 Yrs 5 Yrs 10 Yrs Investment Management 1 1.1% 1.1% 1.1% 1.1% Advice 0.6% 0.6% 0.6% 0.6% Administration 0.4% 0.4% 0.4% 0.4% Other 0.0% 0.0% 0.0% 0.0% Effective Annual Cost 2.1% 2.1% 2.1% 2.1% Where applicable further explanatory notes will be added if we have had to make certain assumptions about the contract such as: Notes: 1 A reasonable best-estimate has been used for transaction charges. Fees paid by the Investment Management Company and received by Old Mutual Isle of Man branch, are included in the Annual Management Charge. All calculations include value-added tax (VAT) at the prevailing rate, where applicable. Each of the columns includes unrecouped expenses at the end of the respective periods. Namely; 1yr, 3yr, 5yr, 10yr, on an annualised basis. At new business stage, we will reflect all fees charged at the start of the contract. However, once the contract is in force, these initial fees will no longer be shown. WHAT DOES EACH COMPONENT MEAN? INVESTMENT MANAGEMENT CHARGE (IMC) Where funds have been selected, this includes the Total Expense Ratios (TERs) and Transactions Costs (TC) (See ANNEXURE ONE for an explanation of TERs and TCs). In the absence of a TER or a TC, an equivalent charge calculated according to the principles in the ASISA Standard: Calculation and Disclosure of Total Expense Ratios and Transaction Costs will be used. The IMC is equal to the sum of the weighted average TER and TC of the underlying funds and investments. The Investment Management Charge is equal to the sum of the weighted average TER and transaction costs of the underlying funds and investments. For fees charged by a Custodian and a Discretionary Investment Manager, a reasonable best-estimate will be used such as custody fees, dealing fees as well as discretionary investment management charges. Actual charges will depend on the underlying investments selected and what your client has agreed with their providers, if they are separate. For Structured or Protected Funds a reasonable best-estimate has been made for the IMC. For Funds, where we were unable to obtain TER and TC figures from the respective investment managers, we have estimated these figures. More detail on the assumed TER and TC figures are available in the fund factsheets. THE ADVICE CHARGE (ADVICE) All charges that an investor pays in receiving advice from a financial adviser. This includes initial advice charges and ongoing investment review fees if applicable. If the initial charge is paid to the financial adviser by the company then the charge is shown as an annual percentage. If the initial advice charge hasn t been paid by Old Mutual International, or the client has not engaged the services of a financial adviser, then the Advice Charge will be reflected as 0.00%. In the event of the adviser charging upfront commission, this will be included here. If your client has agreed that Old Mutual International pays you commission (rather than the Initial Charge) we invest the full contribution received, and then levy a charge, known as the contract Establishment Charge. This charge will be recouped over the five-year period and reflected as such in the table under Advice.

3 ADMINISTRATION CHARGE (ADMINISTRATION) This includes all charges that the investor incurs relating to the administration of the IP+. Unrecouped charges are not included in this charge. Also reflected in this charge will be the IP+ Fund Access Fee and if applicable the Custodian Access Fee. Fees paid by the Investment Management Company and received by Old Mutual Isle of Man branch, are included in the Annual Management Charge. The Admin Fee may only be applicable to the current contract and will not take into account linked plans. THE OTHER CHARGES (OTHER) The EAC calculation should include unrecouped charges within reason, should the investor wish to end their contract or withdraw all their funds at the end of the period being calculated. For IP+, any deferred disinvestment charges which have been carried across from the investor s previous Life Account II policy are included in the new IP+ contract and will be reflected here. The Establishment Charge relating to the IP+ product won't be included in this figure. WHAT ABOUT STRUCTURED OR PROTECTED FUNDS? Initially when buying a Structured or Protected Funds, the arrangement fee is included in respect of the Structured Fund. This fee is only shown at new business stage and not in subsequent years. An assumption has been made that the proceeds of all Protected Funds, except the Old Mutual International US3 Autocall Structured Fund, will be moved to the Transaction Account after the maturity of this Fund. For the Old Mutual International US3 Autocall Structured Fund, an assumption has been made that the proceeds will be moved to the Transaction Account after the maturity of this Fund and that the Old Mutual International US3 Autocall Structured Fund runs its full term and does not mature early. ON WHAT DOCUMENTATION WILL YOU FIND THE EAC TABLE? The EAC table will be shown on all transaction documents. However, this will be implemented on a phased basis. Phase One, which will be implemented on 1 October 2016, will include the transactional documents involving new business for IP+; such as the Quote and the Planned Summary Report. For existing business the EAC table will be shown on any Switch Letters and Quarterly Statements. Phase Two will include all Top-ups for all IP+. All legacy products are out of scope such as Life Account, Life Account 2, Alpha, Maxima, etc; these will be implemented on at a later date. WHAT DOES THIS MEAN FOR YOUR CLIENT CONVERSATIONS? You can now compare charges on most retail investment products and the impact these charges have on investment returns. This can be done across the various regulatory wrappers so that you and your client are in a position to make more informed decisions around retail savings and investment product choices. However, bear in mind that it does not measure the features of a financial product. WHO DO YOU CONTACT FOR FURTHER ASSISTANCE? Please contact your Regional Offshore Specialist should you require further help with the above. also contains the full paper should you wish to read through it.

4 ANNEXURE ONE TOTAL EXPENSE RATIOS AND TRANSACTION COSTS EXPLAINED WHAT IS TOTAL EXPENSE RATIO (TER) TER is the global standard used to measure the impact the deduction of management and operating costs have on a fund s value. It gives you an indication of the effects that these costs have on the potential future growth of your investment. Expressed as a percentage, a fund s TER is calculated over a rolling three-year period (or since inception where applicable) and annualised to the most recent quarter end. Where the fund invests in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant fund s TER. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. Also, the current TER may not necessarily be an accurate indication of future TERs. Expenses included in the TER The costs that comprise the TER are expenses that the unit trust management company is unable to quantify upfront as they depend on specific or variable circumstances. The TER is an annualised value and includes: Annual service fee Fund s bank charges Fund s audit fees Taxes (e.g. stamp duty, VAT) Custodian and trustee fees custodians and trustees are appointed to protect the interests of the unit-holders, and the fees pay for their services. Costs related to scrip lending Performance fees: Performance fees are a form of fund management fees expressed in variable terms for generating positive returns. This variable charging structure aligns the interest of both the investor and the management company. As TERs are calculated over rolling 36-month periods, a portion of performance fees earned during 2013 and 2014 will be included in the calculation of the class s TER in Expenses NOT included in the TER Charges not included are generally of a one-off nature, and deducted from the investment capital as opposed to the underlying portfolio: Initial charges (including commission) deducted from the investment amount prior to units being bought. Annual adviser fees agreed upon between the adviser and the client this cost agreed between client and adviser is deducted monthly through the sale of units. Stockbroker fees this is a portfolio fee and covers the trading costs incurred when buying and selling securities. Expenses related to the settling of transactions and taxes associated with buying and selling securities via a stockbroker (e.g. securities transfer tax). Scrip lending fees earned may not be offset against expenses. Transaction Cost (TC) TC is a necessary cost in administering the fund and impacts fund returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of fund, the investment decisions of the investment manager and the TER. Calculations are based on actual data where possible and best estimates where actual data is not available. Transaction costs include: VAT Brokerage Securities transfer tax (STT) Investor protection levy STRATE contract fees Exchange rate costs Bond spread costs Fees associated with Contract for Difference (CFD) s

5 DISCLAIMERS Old Mutual Isle of Man, branch of Old Mutual Life Assurance Company (South Africa) Limited, is registered in the Isle of Man under number F and whose principal place of business is King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Phone: +44 (0) Fax: +44 (0) Licensed by the Isle of Man Financial Services Authority. Old Mutual Life Assurance Company (South Africa) Limited is incorporated in South Africa (reg. number: 1999/04643/06). Registered office: Mutualpark, Jan Smuts Drive, Pinelands, Cape Town, South Africa. Old Mutual Life Assurance Company (South Africa) Limited is a registered long-term insurer and a licensed financial services provider. OMISA/1.0/EACD Communication