Sanlam Cumulus Investments Recurring payments

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1 For intermediaries June 2017 Sanlam Cumulus Investments Recurring payments Effective Annual Cost (EAC) The Effective Annual Cost (EAC) measure is an Association for Savings and Investment South Africa (ASISA) Standard that shows the extent to which the investment return on a financial product will be reduced if it is terminated. The lower the total EAC number, the more cost-effective the investment is. The purpose of this article is to help improve your understanding of EAC. EAC components The Standard requires that all the different charges which are levied on a financial product and any bonuses added, must be allocated into one or more of the following components: Investment management Advice Administration Other EAC mandatory disclosure periods The Standard further requires that the value for each of the components and the total EAC must be displayed in a table at mandatory disclosure periods: The effect over 1, 3 and 5 years should always be shown irrespective of the term to chosen retirement date. The term to chosen retirement date is shown as the 4 th disclosure period. If the term to chosen retirement date is exactly 5 years, only 3 disclosure periods will be shown. The EAC may vary over different time periods. The total EAC for each disclosure period is included in the last row of the EAC table. The Standard also requires that free text notes must be included below the EAC table. The purpose of these notes is to explain which charges were allocated into each of the different components. Sanlam is a Licensed Financial Services Provider.

2 Let s look at an example of a Sanlam Cumulus Investments plan for further discussion on its EAC calculation. Term to : Recurring payment: Investment funds: Commission: Reality membership: 10 years R5 000 per month increasing with 5% per annum 33% SATRIX Balanced Index Fund 33% SIM Balanced Fund 34% Sanlam Escalating SIM Balanced Fund 50% (i.e. 2.5%) initial commission 50% (i.e. 2.5%) payment-based commission No Important: The numbers in the EAC table show the extent to which the investment return on the investment will be reduced if the investment is terminated at the end of a given period. The total EAC number for each disclosure period is calculated as: EAC (Investment management) + EAC (Advice) + EAC (Administration) + EAC (Other) For our example, the total EAC number for e.g. year 1 is: 0.8% + 8.9% + 0.4% + 1.3% = 11.4% Impact of charges over Notes Where applicable, all calculations include VAT at the prevailing rate. Where applicable, inflation is taken into account when calculating the EAC. All EAC numbers are shown in percentages rounded to one decimal. 1. Investment management The investment management charges are allocated to the Investment Management component after any rebates received from an asset manager and Sanlam Reality discount, if applicable, have been deducted. The EAC for this component is calculated based on the current investment fund selection using the Total Investment Cost (TIC) of each of the selected funds.

3 TIC is a measure of the actual costs incurred over the past 3 years in managing the investment fund. It is expressed as an annual percentage of the assets under management of the investment fund and therefore the value of the Investment Management component is the same over all the different time periods. TIC = Total Expense Ratio (TER) + Total Cost Ratio (TCR) TER includes the annual management fees of the investment fund s manager, both the fee at benchmark and any performance fee charged, as well as any custodian fees. TCR relates to the more direct investment costs and mainly consists of trading costs (e.g. brokerage), taxes (e.g. Value Added Tax (VAT), Securities Transfer Tax (STT), Share Transactions Totally Electronic (STRATE) and FSB Investor Protection Levy. The TIC used in the EAC number is a weighted average total of the TER and TCR of the selected investment funds. The weights used relate to the proportion of the payment allocated to each of the selected investment funds, at the time of the calculation. As you can see in our example, the EAC (Investment Management) is determined as follows: Investment fund Fee type Fee range Fee at Platform Latest * TIC benchmark management fee SATRIX Balanced Index Fixed 0.29% 0.29% n/a 0.74% Fund SIM Balanced Fund PBF % 0.40% n/a 0.83% Sanlam Escalating SIM Balanced Fund FoF 0.00%+ 0.00%+ n/s 0.70% The weighted average TIC for this plan is calculated as: (33% of 0.74%) + (33% of 0.83%) + (34% of 0.70%) = 0.24% % = 0.8% * The latest TIC used is as at 31 March The TIC excludes the smoothing charge for the Vesting Bonus Fund and the guarantee charge for Sanlam Escalating funds. In both cases these charges are included in the EAC (Other) component (as required by the Standard). The actual investment costs can vary significantly over time for investment funds with performance fees or fund of fund type investment funds. The quotation provides information on the investment fund type and fee range. This should be taken into account when the TIC of the specific fund is evaluated. If the plan holder is a member of Sanlam Reality, we give a discount on the fee at benchmark for certain Sanlam Investments funds. The quotation provides information on the fee at benchmark. This discount is not guaranteed and depends on the Reality option and tier status at the time of the EAC calculation.

4 Some asset managers pay us a platform management fee. This is a discount on the asset management charge because we offer their investment funds for this type of plan and meet their conditions. This fee is taken into account when the Fixed Marketing and Administration charge is calculated. The impact of this fee is that this charge is lower than what it would have been without taking this fee into account. If the fee changes the Fixed Marketing and Administration charge will be adjusted accordingly. 2. Advice The EAC for the Advice component shows the effect of the charge levied on the plan to recover any initial and payment-based commission paid to the intermediary. The value of this component is therefore dependent on the commission negotiated - if none is negotiated then the component will show zeros over all time periods. Impact of charges over If commission is negotiated to be less than the maximum allowed, the recurring payment will be enhanced with an additional allocation equal to the reduced commission percentage i.e. 0 5%. The EAC (Advice) number will therefore be adjusted lower accordingly. 3. Administration The Administration component includes part of the Variable Marketing and Administration charge used to cover the costs associated with the administration of the plan. The effect of any stop order payment charge is also included in this component. As required by the Standard, Sanlam had to calculate what part of the Variable Marketing and Administration charge is used to cover the actual administration costs. This was done by averaging the actual administration costs incurred across all investment products and over all durations, and expressing this as an annual percentage of the fund value. Therefore, as the fund value increases over time, the value of the Administration component will reduce gradually. As you can see in our example, the EAC (Administration) number reduces from 0.4% over year 1 to 0.2% over the term to i.e. 10 years:

5 Impact of charges over The stop order payment charge (currently) 3.5% of each payment is expressed as a percentage of such monthly payment. However, the EAC is expressed as an annualised percentage what does this mean? Refer to page 6 for an explanation. As such, the EAC (Administration) number for a plan with a stop order payment method will be significantly higher compared to that of a similar plan with a debit order payment method. 4. Other The Other component includes the monthly Plan charge, Fixed Marketing and Administration charge as well as part of the Variable Marketing and Administration charge used for our marketing and other distribution costs. The Other component also makes allowance for any alteration charge (which is 0% after two years from the start date) and the transaction charge which is levied at termination before the chosen. The transaction charge is calculated as the smaller of R300 and 1% of fund value on termination. This component also includes the effect of the Loyalty Bonus payable on termination. As mentioned earlier, the effect of any guarantee or smoothing charge applicable for the Sanlam Escalating funds and Vesting Bonus Fund will be included in this component. This charge is expressed as an annual percentage of the fund value. Therefore the value of such a charge is the same over all the different time periods. In our example it will therefore be 0.3% (i.e. 34% of 0.8% guarantee charge) over each of the different disclosure time periods. Impact of charges over What is also important to note is the impact of the alteration charge on the EAC (Other) number over year 1. The fact that the alteration charge is 0% after two years can be seen in the significant reduction of the EAC (Other) number over the other disclosure time periods.

6 The EAC table provides a lot of numbers - what does this mean? When the financial products of different providers are compared in a like-for-like scenario, the EAC numbers of the different products will most likely differ between the various components over the different time periods even though the total EAC numbers may be the same between these products. Why? The Standard requires what the EAC table should consist of but where a specific charge does not cover a specific expense, product providers should use their discretion to split the charge between various components to reflect reality as accurately as possible. The total EAC number for the term to is the one number to focus on because it shows the ultimate effect of the charges and any bonuses over the duration of the term to the chosen. EAC only provides information about the impact of charges but when selecting the appropriate product for the client, the product features and benefits (e.g. affordability of payments, investment fund choice, optional investment guarantees) must play a very significant role in the decision-making process to address the additional value that the product may offer. EAC is expressed as an annualized percentage what does this mean? The EAC measure shows the annualized impact of any given charge. When any charge is deducted from the monthly payment (i.e. payment charge), the annualised EAC numbers for this charge seems a bit odd across the different time periods. This is due to the fact that when the term over which the charge is annualised is one year or less, the annualised number is higher than the charge deducted from the payment. The formula for the calculation of the annualised percentage is the following: ((1+charge%) 12/term -1)*100 Now, let s look at a plan with a monthly payment to explain this. In year one 12 payments are being made by the client i.e. one each month. If this plan uses a payment charge of 5% to recover the intermediary remuneration, the EAC (Advice) number for year 1 effectively consists of the average of 12 different EAC (Advice) numbers i.e. those for the charge deducted from each monthly payment. The table below shows the annualised calculation of each monthly payment charge or the 12 different EAC (Advice) numbers for year 1:

7 Month Formula EAC (Advice) number 1 ((1+0.05) 12/12-1)*100 5% 2 ((1+0.05) 12/11-1)* % 3 ((1+0.05) 12/10-1)* % 4 ((1+0.05) 12/9-1)* % 5 ((1+0.05) 12/8-1)* % 6 ((1+0.05) 12/7-1)* % 7 ((1+0.05) 12/6-1)* % 8 ((1+0.05) 12/5-1)* % 9 ((1+0.05) 12/4-1)* % 10 ((1+0.05) 12/3-1)* % 11 ((1+0.05) 12/2-1)* % 12 ((1+0.05) 12/1-1)* % As you can see in the table above, the annualised effect of the charge deducted from the first payment is exactly the same as the charge i.e. 5%. But the term of each payment charge deducted in subsequent months in that year is less than 1 year and therefore the annualised effect increases. For example: The charge deducted from the last payment is only available to the product provider for one month and therefore the annualized effect on this charge is significantly higher than the charge itself. The EAC (Advice) number over year 1 is about 9.6% calculated as the average annualised effect for the 5% payment charge deducted from each of the monthly payments. It is slightly less than double the payment charge of 5% or alternatively, roughly the average at the mid-point of the term over which it is calculated i.e. for year 1 it is: (Month 6 + month 7) 2 = (8.72% %) 2 = 9.5% The annualised effect of a payment charge over longer periods e.g. 3 years is less than the actual payment charge of 5%. The reason for this is that the payment charge deducted from each of the monthly payments over the 36-month period is available to the product provider for much longer than 12 months. The result is typically an EAC (Advice) number of 3.3% over 3 years. As such the annualized effect of a payment charge becomes smaller as the term over which it is calculated increases. This article is part of Sanlam s on-going support to intermediaries. It does not constitute advice by Sanlam.