EDUCATIONAL INSIGHT

EFFECTIVE ANNUAL COST (EAC) – WHAT YOU NEED TO KNOW

Article by Satrix Investments

What is EAC?

It is a standardized method to disclose product costs and can be used by you and your client to compare charges on most retail investment products.

Why the EAC initiative?

The EAC measures are intended to help clients make better informed decisions around retail savings and investment products. The Association for Savings and Investment SA (ASISA) designed this measure to eliminate the confusion around the different cost measures currently in use, e.g. reduction in yield (RIY) and total expense ratio (TER). The measure was created in the spirit of treating customers fairly (TCF), specifically outcome 1, where the fair treatment of customers is central to the corporate culture, and outcome 3, where clients receive clear and appropriate information before, after and during the point of sale.

To whom does it apply?

All financial institutions that are ASISA members need to comply with the EAC Standard. That includes collective investment schemes, linked investment service providers, insurers that offer investments in a life wrapper, asset managers, retirement annuity funds and preservation funds.

Which figures must be shown?

Product providers must show the impact of the four types of charges should investors cash in their investment after one, three, and five years or keep it until the maturity date of the product in the following table format:

Which figures must be shown?

 The calculations assume clients terminate the investment at the end of each of the relevant time periods shown in the table. EAC figures must be provided to one decimal, and product providers must also describe what the individual components consist of in more detail.

Which maturity costs are used for unit trusts and retirement products?

For open-ended products with no term to maturity, such as unit trusts, the last column will show the impact of charges over 10 years.

For retirement products, the time to age 55 will be used.

Where will you find the EAC figures for unit trusts?

For SCI funds, wherever the minimum disclosure document (fund fact sheet) for a fund is disclosed to the public, the EAC calculator will be displayed next to it. The calculators on public websites will use the maximum fees for the specific fund class shown on the website. This will typically be the most expensive retail class.

We recommend advisers use the calculator on Sanport, where they can do a fee override to provide quotes for a fund class other than the most expensive retail class. Advisers will also be able to access the EAC for Satrix funds via the Sanport calculator.

When will clients receive these EAC figures?

Other than the EAC being publicly displayed before the point of sale, the product provider will send the figures to clients via the welcome letter once a new investment has been made.

Also, whenever clients do any of the following, a daily activity statement with the latest EAC figures will be emailed to them: add more money to their investment (including a switch into a fund); increase a debit order; or make a section 14 or directive 135 transfer. Whenever intermediary remuneration charges change, this will be communicated to the client with the updated EAC figures.

When is EAC implemented?

The EAC Standard replaces the Code on Policy Quotations on 1 October 2016, but is gradually implemented for existing products. EAC figures must be shown for all new business from 1 October 2016. For existing business, the implementation is phased in as follows:

When is EAC implemented?


What is the responsibility of advisers?

It might happen that a product is more expensive on one platform than on another. It’s important to work with the term to maturity or the most likely investment period of the client, and explain to the client what value is added for the additional cost of the more expensive product before a recommendation is made to invest in the more expensive product. Examples of a value-add could be: a guarantee, more flexibility, ease of transacting, wider investment choice or superior post-sale service.

Also, advisers need to keep a record of quotes prepared for clients by downloading and saving the pdf document provided on Sanport.

Who can I call if I have any questions relating to the EAC Standard?

If you’re unable to find the EAC for the specific fund class you’re looking for, please contact our client contact centre at 0860 100 266 or email service@sanlaminvestments.com

POSTED : 8 OCTOBER 2016

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