Investors encouraged to use new EAC cost measure
From 1 October this year, banks, asset managers and insurers – in fact, all members of the Association for Savings and Investment South Africa (ASISA) – have been introducing a new standard measure for calculating the full costs of buying and holding a financial product over time, called the Effective Annual Cost (EAC). The EAC is meant to help consumers better understand all the costs involved in their purchase and make better informed decisions.
This will cover most types of investments like unit trusts (collective investment schemes), savings policies, ETFs, bank fixed deposits and retirement annuities. It excludes pure insurance products.
Prospective investors will be able to have their own EAC for each product calculated through an interactive automatic quote tool found on product providers’ websites. Alternatively, they can phone the provider directly.
The EAC incorporates four categories of costs: investment management charges; advice charges; administration charges; and other charges. Each is expressed as an annual percentage of the investment amount.
To arrive at the total EAC, the investor needs to provide certain information, like whether they plan to invest a lump sum up front, or to invest smaller amounts regularly over time, as well as any advice fee(s) agreed with a financial adviser.
Product providers must show the EAC in a table like the illustrative example below. The EAC calculation assumes that an investor terminates their investment at the end of the relevant periods shown in the table.
The investment management charge reflects all costs and charges for underlying investments, including the annual investment management fee, any initial charges, ongoing charges like performance fees and transaction costs (such as for trading).
The advice charge incorporates all charges an investor incurs for the provision of financial planning or advice by a financial adviser. If the investor hasn’t used a financial adviser, this will be reflected as “0.0%”. Otherwise the advice fee agreed between the investor and their adviser (incorporating initial and/or ongoing fees), will be included, as it will where an adviser is paid a fee directly by the investment product provider (known as a rebate).
The administration charge reflects all costs an investor incurs related to the administration of the product by the product provider.
Finally, the other charges category includes any other costs, such as termination charges, penalties, costs of guarantees, smoothing or risk benefit costs, loyalty bonuses, etc. It is meant as a “catch-all” for any remaining costs, and each of these costs must be explained in notes accompanying the EAC table. Prudential does not add “other charges” to our products, so this category will also be shown as 0.0%.
In our view, the EAC will give consumers greater awareness of the true total costs associated with an investment, and help them decide which option is best for them. While it’s important to remember that the lowest-cost product is not necessarily the best, it’s certainly better for consumers to be fully informed of all aspects of financial products, including all potential cost implications, before they invest.
How can Prudential clients and advisers access their EAC?
Prudential clients and advisers can access their unique EAC information by phoning in to our Client Services Centre on 0860 105 775 or emailing us at firstname.lastname@example.org. The EAC tool is expected to be available to access directly from the Prudential website in November.