Despite attracting R341-billion of inflows over the last five years, the South African unit trust industry needs to address its excessive fee structure if it wants to retain its status as the premier investment vehicle amongst consumers.

According to Nick Brummer, director at investonline.co.za, while the unit trust industry is able to offer investors excellent long term returns and is a great way to gain exposure to equities, the various layers of fees that investors are required to pay simply to access these products is still far too high.

"Some unit trust providers charge high upfront fees and annual fees in addition to platform and annual fund manager fees. Once all of these are taken into account, this can considerably deplete the return on investment over the long term."

He says that this concern over fees has resulted in an increasing number of investors turning to exchange traded funds (ETFs) over the last year, which offer lower fees than traditional unit trusts. "ETF's are a passive investment vehicle designed to track various indices, such as the SATRIX 40, which tries to mirror the movement of the top 40 shares on the JSE All Share Index.

However, ETFs are far riskier than unit trusts as they do not have the safeguard of a dedicated expert managing your risk exposure."

According to Brummer, some players in the unit trust industry have recognized the need to reduce fees and are finding innovative ways to do so.

"One problem is that there are simply too many intermediary charges, which adds to the layer of fees paid by investors. However, advances in technology mean that there are ways to remove or reduce some of these costs."

For example, by using an online platform, including an automated risk profiling tool, investonline.co.za has been able to offer investors independent advice and access to a comprehensive range of unit trust portfolios that match their needs, with no upfront fees and reduced ongoing platform fees.

He adds that while there is also room for fund managers to reduce their fees, there will always be some cost premium attached to actively managed funds.

"Unit trusts managed by skilled and experienced investment professionals have the ability to significantly outperform their benchmark indexes."

The top two performing unit trust funds have achieved 211% and 180% respectively over the last five years, compared to 119% returned by the JSE ALSI. Even over the last year, when there were huge levels of volatility in the stock market, unit trusts have continued to deliver strong returns with top performers delivering returns of as much as 70%.

"If the unit trust industry can reduce its fee structure to more reasonable levels, it will prove to be the ultimate investment vehicle for a long time to come, concludes Brummer.