“If all the authority will do is lift the restriction on the collection of management fees for direct expenses, it is far from the committee’s conclusions and also unsatisfactory and disappointing.” This is how Prof. Yishai Yaffa sums up the recent decision of the Capital Market Authority to abolish the management fee limit for direct expenses at a rate of 0.25%. Yaffa, a professor of economics and finance at the Hebrew University, headed a committee appointed to examine the possibility of changing the structure of the collection of commissions for direct expenses in provident funds.
Last week, the Capital Market Authority, after accepting the conclusions of the Yaffa Committee, announced that it was abolishing the limitation of management fees for direct expenses. From now on, each manager will be able to determine each year how much the additional management fee he wants to charge customers for that year.
The pension funds charge fees of three types: a commission for the accrual (the capital that has already been saved), a commission for the deposits (the capital that is deposited monthly into the fund), and in addition both expenses are charged directly. These fees are charged retrospectively each year for the use of investment personnel outside the management company or for other ancillary expenses incurred in complex investments (lawyers, brokers, etc.).
Until now, it has been possible to collect, as stated, commissions at a rate of 0.25% from the pension funds, which amount to NIS 2,500 per year in a pension fund amounting to NIS 1 million. For 20 years, this has been a cumulative commission of NIS 50,000. In the past, the institutions used to charge these management fees in secret, but the Capital Market Authority required managers to be more visible and to present the fees charged separately.
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Professor Yishai Yaffe
(Photo: Uriel Cohen)
“The draft deals with one comma of the set of recommendations. If this is the end, it’s really problematic.”
Yaffa explains that the draft does not correspond with the committee’s conclusions or at most adopts a point change from the content: “We recommended three main changes in the pension market. The first recommendation is to simplify the price, which is as close to one price as possible, Like paying for a tomato, a car or a falafel.
“The second recommendation is to allow savers to save for pension products through index-tracking products, such as mutual funds and ETFs, without all the brokers and expensive expenses in other funds. Once a question is set up, companies will have to ask savers what they prefer. The third recommendation is investment routes with dependent management fees “In these funds, if you have invested in expensive things for me, and it turned out great, you will be a part of it. If it turns out badly, sorry for the French, you too will pay and charge less in management fees.”
So where did all these conclusions go?
“The draft deals with one comma of the set of recommendations, and according to the authority this is one of the first changes they intend to implement. Therefore, my approach to the last step of the authority is different, insofar as it is the only recommendation implemented .
Do you feel comfortable with the abolition of the management fee collection restriction?
“This is part of a process of price simplification, which will ultimately be a uniform and comprehensive price. In order to achieve the goal, the Authority is faced with two alternatives. The first, which is not preferred by the Authority, is to set a uniform and comprehensive price. , Accrual and direct expenditures – but these will be fixed. The decision of the authority indicates that its representatives did choose the second alternative, contrary to what I had hoped. “As far as I understand, this is not the intention.”
The market is very skeptical. The draft is interpreted as an unequivocal victory of the institutionalists.
“This document (the draft that was published), apart from the fact that it is not well written, is also very lacking. The insurance. I have no idea right now, but I tend to think they do intend to do more. I’m not in marketing, but if you were to ask me how to market it, I would say that the authority should have issued a document in human language and not in legal language. In addition, explain what they are going to do next. “
“Competition in the pension market is not sophisticated and will not lead to the right balance”
Institutional are tremendous machines of revenue and profits. Why can they not cancel the commission?
“I think they can. Whoever says no, claims that if he does not charge management fees for direct expenses, once he has to invest in brokerage investments he will not do it because he understands he is paying the expenses out of his money. So he will choose not to pay – In my opinion, this argument is incorrect because it hides the opposite problem, which concerns the institutional overcharging using this tool.Even when buying a car, the manufacturer can always switch to cheaper tires because investing in expensive tires costs him more. In the same way, if I buy a fund with 5% quality non-marketable investments that require a high payment and receive a fund with a lower investment rate, the blame is on the manager who gives a bad product.
“Beyond that, the institutionalists claim that they can not charge too much because of the reasons for competition. In the pension market the competition is not sophisticated because there are a small number of sellers and managers, and there are also information gaps between investment managers and savers. Due to the lack of information. Insurance agents, who are supposed to bridge the information gaps, are also inclined to direct savers to what pays off for them compared to what pays off to save. The expensive funds pay off. “
The draft published by the Authority also benefits hedge and investment funds, which provide institutional investment services with a fixed management fee and a fixed rate of excess return, called success fees. The Authority proposes to exempt them from limiting the management fee to direct expenses due to the inability to estimate in advance their annual scope, most of which are determined by the return provided by the funds. Yaffa agrees with this exception, but emphasizes that it is only possible if the authority launches pension schemes that will charge very low fixed management fees alongside success fees.
Last Thursday, April 14, the Capital Market Authority issued complementary measures to the draft that lifted the restriction on the collection of management fees for direct expenses, under which institutional bodies will be required to offer a passive investment route at discounted management fees, and a negotiable investment route without direct expense fees. In addition, it will be possible to offer investment routes with differential management fees and performance-based management fees. Beyond that, the director of the pension fund will be required to present to each saver the total cost of management fees – including direct expenses – at a uniform and comprehensive rate, and the total cost expected to be charged at the level of the investment track will be explained. The interview with Yaffa was conducted before the publication of the supplementary measures.