Sygnia is right – but still got nailed

Sygnia suffered an adverse ruling at the hands of the Advertising Regulatory Board for its fee claims. Curiously, Sygnia’s claims are 100% correct.

In February, Sygnia ran a marketing campaign with the payoff line, “Invest better with a Sygnia Retirement Annuity”.

“Are you aware that you could be losing as much as 60% of your retirement savings to fees? There’s a better way,” it said.

“Make the switch to a Sygnia Retirement Annuity and maximize your retirement savings. Secure your financial future with Sygnia.”

These claims did not sit well with Braam Hattingh, who lodged a complaint with the Advertising Regulatory Board (ARB), saying Sygnia’s advertisement was misleading.

Hattingh disputed Sygnia’s claim that retirement annuities are so costly that they can eat up as much as 60% of one’s savings.

“This is a blatant lie that is told to convince clients that they must move their retirement annuities to Sygnia. It creates confusion and is misleading,” he said.

Sygnia responded, explaining that recurring fees have the compounding effect of reducing one’s investment returns over time.

It cited a July 2013 discussion paper from the National Treasury titled “Charges in South African retirement funds” to explain its claims.

“If the recurring charges deducted from the fund account of a regular saver are reduced from 2.5% to 0.5% of assets each year, he would receive a benefit 60% greater at retirement after 40 years, all else being equal,” it said.

“Alternatively, the saver could get the same retirement benefit by making contributions over his or her lifetime that are around 40% lower.”

The ARB was not convinced. It said the discussion paper Sygnia referenced was from over a decade ago.

“More specifically, it appears to be based on a speculative model rather than actual fund comparisons,” the ARB said.

The ARB admitted that Sygnia’s example is a mathematical reality. However, it argued that it was a hypothetical situation and not necessarily market-related.

“There is nothing to show that these charges represent charges that apply to the current South African retirement annuity landscape,” it said.

“A reduction in charges from 2.5% to 0.5% constitutes an 80% reduction. It is not clear whether these charges were reflective of the market reality.”

“The nearly 11-year-old hypothetical model is virtually meaningless when it comes to the way the current advertised claim is made.”

The ARB ruled that Sygnia’s claim that investors risk “… losing as much as 60% of your retirement savings to fees …” is unsubstantiated and in contravention of the advertising code.

Daily Investor investigates

Daily Investor investigated Sygnia’s claim based on the concerns and ruling from the Advertising Regulatory Board.

There are essentially two questions which should be answered:

• Is Sygnia’s charges around 80% lower than what some other South African asset managers charge?
• Does a 2.5% annual fee result in a loss of 60% compared to a 0.5% fee?

The answer to the first question is easy. Sygnia charges an annual administration fee of between 0.10% and 0.40% on its ETFs, external unit trusts, and ETNs.

Daily Investor considered the fees Allan Gray charges on its Equity Fund to simplify the comparison.

Allan Gray’s Equity Fund had a total expense ratio (TER) and transaction costs of 2.97% over the last year.

Many other funds have even higher fee structures, which shows that a 2.5% annual management fee, although high, is relevant for Sygnia’s comparison.

Daily Investor then considered the impact of a 2.5% annual management fee on the investment return over 40 years. For this comparison, we selected the S&P 500.

It revealed that a 2.5% fee, instead of 0.5%, will cost investors 55% of their return over 40 years. Although it is not exactly 60%, there are many scenarios in which it will reach 60%.

This means Sygnia’s claim that “you could be losing as much as 60% of your retirement savings to fees” is accurate.

The chart below shows the impact of higher fees on your investment return over 40 years.