What is an investment platform?

Millions of South African investors who are invested in a collective investment scheme or unit trust, retirement annuity, umbrella retirement fund, investment-linked living annuity, preservation fund, endowment or tax-free savings account, use an investment platform.

Investment platforms are like fund supermarkets that offer a range of brands in one shop. Platforms make it easy for you to buy a range of unit trust funds and exchange traded funds (ETFs) from different providers from one secure online fund shop.

Investing in funds through an investment platform, also known as a linked investment services provider (LISP) or an administrative financial services provider, makes it easier for you to switch between funds after you have invested.

You can also see what your investments are worth on a single statement in order to keep track of your overall asset allocation and the taxable capital gains, interest and dividends that you need to report to the South African Revenue Service (SARS).

A platform is essentially a system set up by an administration company that bulks individual investors’ transactions into funds. Unit trust companies are then often able to offer their funds to investors using platforms at cheaper fees, and this may offset some or all of the fee that the investment platform charges.

Platforms also offer you the option to invest in funds through products such as a tax-free savings account, a retirement annuity, an investment-linked living annuity or an endowment.

If your employer-sponsored retirement fund or umbrella retirement fund offers you a choice of investments, it is also probably using an investment platform.

Easier for advisers

Most financial advisers recommend investments through an investment platform.

Some advisers outsource the construction of investment portfolios to discretionary investment fund managers or DFMs.

Platforms help advisers and DFMs to manage investment portfolios for investors who have similar needs and risk profiles. They set up what are known as model portfolios based on broad investor types, and manage them uniformly for the whole group.

Although each investor is invested in funds in his or her own name, the adviser or DFM manages the asset allocation and exposure to the underlying funds in each model portfolio with a single instruction to the platform. The platform implements changes in each investor's portfolio.

Advisers and DFMs are often able to negotiate even greater discounts on fund fees. This discount may be diluted by the DFM fee.

A tied agent employed by a financial institution may recommend you invest through the group’s platform, or may be able to recommend more than one platform.

Platforms may have different investment offerings, service levels, tools and research you can access.

Fund choice

The most obvious difference between platforms is the selection of funds listed on the platform.

Some platforms have what is known as “open architecture” – they will list any fund that an adviser asks them to list on the platform. They may offer more than 1500 funds while other platforms offer a much smaller range of funds they regard as suitable for investors.

Most platforms now offer lower-cost index-tracking investments. These can be either index-tracking unit trust funds or exchange traded funds (ETFs), but some platforms do not offer access to ETFs – only index-tracking unit trust funds.

There are also investment platforms that only offer ETFs.

A few investment platforms offer hedge funds and for investors using endowments, direct share or private equity investments.

The fees

Different platforms charge different fees but funds are generally cheaper to access via a platform than directly from a unit trust manager, especially when you are investing larger amounts.

You may pay platform administration fees on a sliding scale, depending on how much you invest. The more you invest, the lower the fees.

When you invest through a platform, you pay the relevant fee for the funds in which you invest and an advice fee if you are using a financial adviser.

If your adviser is using a DFM to select managers and blend funds, there may be a fourth fee for the DFM.

Advisers and DFMs may be able to negotiate lower asset management fees on the funds they select. You may therefore be invested in a special fee class with a lower fee than you could get if you invested directly. This discounted fee may offset all or some of the cost of using the platform and the DFM.

Some platforms operate within a financial services group that has its own unit trust funds or ETFs. These platform providers may offer you a reduced platform fee or no platform fee if you invest in the funds in their group.   

Switching platforms

If you invest with one platform and later decide to switch to another because the fees are cheaper or the administration is more efficient, you can, but remember that if you switch a retirement annuity there is a process to follow under section 14 of the Pension Funds Act.

If you are moving from one platform to another and both platforms have the same fund, you should be able to switch your units in the fund without selling them and potentially incurring capital gains tax.

However, the fee classes may be different.

Some platforms charge exit fees if you move all your investments off the platform.

Offshore platforms

If you want to invest offshore, you can do so on a local investment platform by buying rand-denominated foreign or regional unit trust funds or ETFs tracking offshore indices.

However, if you want to invest directly in assets in a foreign currency, you need to choose a platform located outside the country. Many established local financial services companies offer offshore investment platforms, making contact easy for you through their local offices.

A South African company’s offshore platform will also know the tax and other regulations with which local investors have to comply.

You can invest up to R11 million a year on a foreign domiciled platform, but only the first R1 million can be invested without getting tax clearance from SARS.

Local platforms can offer you the option to hold your offshore investments in South African life insurance endowments. The life company will pay income tax on your behalf at a rate of 30% and capital gains at a rate of 12%.

When investing on an offshore platform, be sure you understand the additional fees you may be liable for, such as transaction charges or additional custody and brokerage fees on share portfolios.