Fees matter


Given that there is nothing certain about your investment fund’s performance, it pays to shop around on one of the few certainties – management fees

IF THE BANKING sector has undergone a major upheaval over the past four years, so too has the investment management business. With both AIB and Bank of Ireland divesting their respective fund management businesses, and Irish Life increasing its hold on the market, investors will find that less competition may also mean increased costs – to the detriment of their returns. So what should investors watch out for?

Last month, Quinn Life agreed to transfer the majority of its life and pensions business – some 5,000 accounts – to state-owned Irish Life, with the deal expected to conclude by the end of the year. Irish Life has already written to customers explaining about the transfer, but the exact terms of the deal remain unclear.

For some investors, the move will be welcome, given the uncertainty that has beset the Quinn Group.

For others however, it may raise the question of whether or not they may face increased charges under their new manager. Quinn Life was typically one of the first ports of call for investors looking for a low cost investment fund option, with its Freeway Funds charging an annual management fee of between 1 and 1.5 per cent, depending on the underlying assets, for its index tracking funds.

Through its deal with Quinn Life, and a similar deal announced earlier this year with AIB to distribute life and pensions products through its network of branches in place of Aviva, Irish Life is now the dominant player in the market, with a one-third share. Indeed Bank of Ireland, which offers products from State Street Global Advisors, is the only major bank in Ireland not to offer Irish Life products, as they are sold in branches of Permanent TSB, EBS, Ulster Bank and now AIB.

So for investors looking for something different, it can take a little bit more work, but there are options out there.

One of the key things to remember is that opting for a fund with a lower annual management fee could pay dividends in the future – depending on performance. After all, a fund with a charge of 1.75 per cent will have to return at least that just to break even – and even if it loses money the charge will still be imposed, so over the long-term, it can really eat away at returns.

A recent survey in the UK found that British investors face higher investment costs than those in the US or Germany, while UK fund managers have increased their fees by about 9 per cent a year over the past decade. With a smaller population and therefore lower economies of scale, Irish investors may even be faring worse.

For example, if you were to opt for a fund with a very low annual fee of just 0.35 per cent, based on a €100,000 investment over 10 years with a 3 per cent annual return, you would pay out €4,630 in total in fees for a total return of €129,761. On the other hand, a fund charging 1 per cent a year will cost you €12,850 in fees, (total return of €121,541) and a fund with a 1.75 per cent charge will see you paying out €21,750 in total over the 10 years, for a total return of just €112,641.

Charges are typically lower for “passive” funds which track indices, while “actively” managed funds, which trade in and out of stocks, are usually more expensive, with the argument being that experienced managers add value. But this is up to you to decide.

So, given that there is nothing certain about performance, it can pay to shop around for one of the few certainties – management fees. Remember however, to query that the management fee you are quoted includes all charges. Most Irish funds are not required to disclose the Total Expense Ratio (TER), which is sometimes higher than the management fee due to the inclusion of audit, legal and custodian fees, while on occasion share dealing and stamp duty costs can also push the fees up. So watch out.

By opting for the broker route, you could open yourself up to some wider options, depending on the broker in question. Products from Standard Life and now Aviva, for example, are distributed via this channel, while financial advisor Gerard Sheehy offers 30 execution-only investment options managed by Zurich Life for an annual management fee of 1 per cent through his investandsave.iewebsite. Similarly, funds from Standard Life are available at lower fees, with the Global Absolute Return Strategies Fund available with a charge of just 1.35 per cent a year. In addition, Sheehy absorbs the 1 per cent life assurance levy introduced last year.

Rabodirect offers another option. Its funds benefit from a low minimum investment of just €100, and annual management fees of between 0.7-1.9 per cent. While it also applies a 0.75 per cent entry and 0.75 per cent exit fee, you can avoid this charge if you opt for one of its top picks for 2012 before April 30th. Options include the Merrion Growth fund, Robeco High Yield Bonds and Franklin US Equity.

But if your priority is to secure exposure to a fund at the lowest possible cost, going down the exchange-traded fund (ETF) route might be a better option. An ETF is a fund that is traded on a stock exchange and typically tracks a specific index. You can find an ETF for most types of investments these days, ranging from agricultural commodities funds, to US property funds, to Korean equities.

Typically, these funds incur some of the lowest charges on the market. For example, the iShares SP 500 fund, which tracks the performance of the SP 500 index, has a Total Expense Ratio (TER), or management fee, of just 0.4 per cent a year. iShares, which is owned by Blackrock, the world’s largest asset manager, has over $620 billion invested in 474 funds.

With ETFs, it is important to note that specific tax requirements apply – although they are traded like a share, ETFs aren’t taxed like one. Moreover, investors also need to file an annual tax return to declare their interest in ETFs.

And there are additional costs to investing in an ETF, given that they must be bought and sold through a stockbroker. If you want to use an Irish broker, online trading at Davy Stockbrokers starts at €15 a trade for frequent users, while TD Direct charges €20 for a standard trade, or €15 for frequent traders. However, account management fees can also apply – TD Direct, for example, charges €15 a quarter for inactive accounts, while at Davy, a twice yearly €40 charge applies to online accounts.

But investors should not be afraid to seek out lower cost alternatives elsewhere. While the reality of a single market for financial services remains some way off, it is nonetheless, possible to sign up to low-cost UK stockbrokers and purchase funds through them, and in some cases, a US broker.

For example, with FXCM Securities (formerly ODL Securities) you need £2,000 minimum to open a trading account, but it only charges $9.99 per trade, while German broker Flatex ( flatex.de) charges €5.90 a trade.