Comparison Rate model for beneficiary funds and umbrella trusts

Financial Planning

Since 2009 the beneficiary fund industry has grown to an estimated R9 billion. Add to this the umbrella trust sector valued at around 10 billion and it is clear that these vehicles are used to look after the benefits due to a significant number of vulnerable children who have lost a parent.

In selecting a beneficiary fund service provider, trustees need to satisfy themselves that the child’s benefits will be safely administered and used for the purpose for which they were placed in the beneficiary fund, that is to pay education related costs and general well-being expenses.

Unfortunately, among the major service providers the quality of service differs significantly, as do the fees that are charged. As a result trustees find it hard to make meaningful comparisons. Often, the headline administration fees charged by a provider may be well below the total costs incurred by the member. This can be due to inflated investment fees, commissions or other undisclosed costs which are often either not included or are underestimated when comparing various service providers.

For example, some service providers charge annual administration fees as low as 0.5% of assets under administration, but a closer look at their investment fees reveals fees of 1.5% pa and more for the equivalent of a money market investment vehicle. That is before adding in transaction fees, funds costs and termination fees.

It is for this reason that a cost comparison model should be adopted by the industry which is modelled on the total expense ratio (TER) for investment funds. Such a model should include all fees and charges payable during the life of the beneficiary fund, based on a set of standardised assumptions.

Fairheads has developed which has been reviewed by an independent actuary. The aim of the model is to provide a simple, standardised way for retirement fund trustees to compare the costs associated with beneficiary funds and umbrella trusts.