How Your Investment Manager Makes Money From Your Portfolio
Investing on the stock market isn’t free.
As well as having to pay the purchase price of your chosen shares, your stockbroker is also making his cut from your transactions.
So where exactly do investment managers make their money from your investment activities?
What are you likely to pay?
Which fees can you shop around for?
Which are set in stone?
And what should you take into consideration when selecting a share trading account?
Let’s take a closer look…
A Comprehensive Guide To Investment Fees
Investment Manager Fee Number #1: Brokerage
When you begin investing, one of the first fees you’ll encounter is brokerage.
This is the cost that a stockbroker charges for carrying out a transaction on the stock market for you. It applies to both buying and selling shares.
It’s a percentage of the value of the shares you trade, but comes with a minimum charge.
Brokerage varies from broker to broker. You’ll find rates as low as 0.3%, up to as high as 0.9%.
When weighing up different brokers, take notice of the minimum amount for brokerage.
Yes, you may find an account offering you brokerage at 0.3%, but the minimum amount is R110.
Whereas another account may charge 0.6%, but the minimum amount is R80.
To help you decide which is the best account for you, you need to work out how much your average spend per transaction is likely to be.
If you don’t plan to make large purchases of shares per transaction, you’d be better off opting for a higher brokerage commission with a lower minimum amount.
If you are likely to spend large amounts per transaction, you may have more scope to negotiate with your broker. Or you may find that brokers will charge less when you spend more per transaction.
Also bear in mind that the brokerage fees you see will likely exclude VAT.
Investment Manager Fee Number #2: Administration Charges
If you’re new to investing, one thing you may find surprising is that not only do you have to pay a charge for each transaction you make, there are costs for just having a share dealing account.
The cheapest administration/management fees are for online accounts.
You can find monthly fees starting from around R50 a month.
Many brokers will waive this fee if you trade a minimum number of times per month or over a quarter or year.
When picking an account, work out how often you’re likely to trade. If you plan on buying shares regularly, this is something you want your broker to offer.
If you’re not likely to be trading very often, you want the cheapest on offer.
Again, bear in mind that many of the advertised fees for administration and management charges don’t include VAT, so add another 14% on to get the real figure you’ll be paying.
Investment Manager Fee Number #3: Added Extras
Many brokers offer different levels of accounts, which come with different features.
As you may expect, the accounts with the lowest management fees don’t offer as much as the ones carrying more expensive fees.
For instance, a basic online share trading account won’t include a facility for making transactions over the phone.
In the event you have to do this, you’ll have to pay for the privilege. For example, Standard Bank will charge you R35 excluding VAT to do this for you.
Or, if you need a copy of a statement, you may have to pay extra for this too. Sanlam iTrade charge R25 per document for this service for their standard account.
Try to anticipate exactly what you’ll want from your broker before picking an account.
By opting for the cheapest account, you may end up paying more in fees for added extras along the way.
Before You Pick An Investment Manager, How Much Money Do You Need?
Another thing you must consider before selecting a brokerage account is how much you have to invest in the first place.
Brokers have a minimum deposit amount to open an account.
Broadly speaking, this tends to be from R50,000 upwards.
Some brokers only focus on high net worth individuals.
By keeping this in mind when selecting an account, you can whittle down potential investment managers to select from.
What About The Fees For Other Instruments?
If you plan to trade in instruments such as single stock futures and contracts for difference (CFDs), you’ll find that slightly different fees apply.
You may find that brokerage is slightly less than what you’d pay for a share transaction, but with this comes the application of a market marker’s commission.
If you’re trading in futures, you’ll likely find that you’ll have to pay a charge per contract as well as your minimum brokerage fee.
The Fees And Charges You Cannot Avoid
Regardless of who you invest with, there are some fees that you have to pay.
These are unavoidable and non-negotiable.
Standing Fee Number #1: STRATE
This fee covers the cost of the electronic settlement of your share transactions through the electronic settlement authority, STRATE.
You pay a minimum of R10.71 for trades valued up to R200,000. For trades over R1 million, the maximum amount is R70.02.
This charge is exclusive of VAT.
Standing Fee Number #2: Investor Protection Levy (IPL)
This is 0.0002% of the value of all share transactions, so you pay this on the buy and the sell leg.
The Financial Services Board (FSB) levies this fee to help fund its role to oversee and regulate the non-banking financial services industry in SA.
Standing Fee Number #3: Securities Transfer Tax (STT)
SARS levies this tax on the purchase leg of all share transactions.
It comes in at 0.25% of the value of the transaction.
How To Minimise What Your Investment Management Pockets
As we’ve seen, there are fees that are set in stone.
But there are ways to try and reduce what you’re paying out for your stockbroker’s services.
Before you open an account, give careful thought to:
- How much you have to invest
- How often you’re likely to buy and sell shares
- What is the average amount you’re likely to invest in one transaction
- What facilities you want your broker to provide
- What you want to invest in and trade
By understanding exactly what you want from a broker, you’re in a much better position to find an account that suits your needs.
You can then seek out the one offering the most competitive fees for your requirements.
For a comprehensive list of brokers, look here or have a look at the JSE’s website.
Until then, here’s to profitable investing.
The Money Lab