Watch out for the TER

EdInvestor

If you're planning to invest in funds - unit or investment trusts - from tomorrow, the fund managers must include a new figure in the Key Features Document.

This is the Total Expense Ratio (TER) and it tells you the total amount of charges you are paying. At the moment you only tend to hear about the Annual Managment Charge - but there are usually other sneaky hidden charges on top that aren't mentioned.

Now these charges can't be hidden any more.

Indy report

Be sure to check the TER figure when investing - especially if someone's trying to sell you "funds of funds" or "multi manager" funds, where there tend to be extra layers of charges.

BTW we can thank Brussels for this change - not our own FSA regulator, which has refused in the past to order providers to tell customers about the TER.

So much for its role as protector of the consumer. :rolleyes:

carnet

EDINVESTOR wrote:

but there are usually other sneaky hidden charges on top that aren't mentioned.

While the TER does include an element for administration it is untrue to say that it is comprised of "sneaky hidden charges".

Annual management fees aside, some, if not most, of the TER is made up of custody and audit fees which have to be borne by all funds.

Now these charges can't be hidden any more

TER figures have been included in the fund details freely available from a few brokers websites, including Hargreaves Lansdown and Bestinvest, for a long time.

The "Fund Key Features Schedule" booklet issued by Cofunds also provides details of the "Additional Charges & Expenses" for every fund included in its service.

"funds of funds" or "multi manager" funds, where there tend to be extra layers of charges

With FoF/MM funds there is obviously an additional element to reflect the extra expenses of buying the underlying funds as well as the additional annual management charges. However these are usually discounted much more heavily than the individual investor could hope to achieve - typically to an average of 0.70 %.

If the investor doesn't realise this, perhaps they shouldn't be investing in these types of funds.

EdInvestor

OK carnet, let's talk about the other charges that still aren't being revealed - do you think these ones are sneaky? They relate to "bundling and soft commissions".These charges are in addition to the ones in the TER.

The FSA is still planning to hide these charges from us. They are due to be revealed to those "in the know" from next January.

FSA proposals

The FSA recognises that the majority of retail investors will have little interest in receiving this detailed information as it would be largely meaningless to them or they have limited means of influencing the investment manager's behaviour if they are unhappy with it.

The FSA, in addressing this discrepancy, is proposing that an individual or body should act as a representative of retail investors who will consider the new disclosures on investors' behalf and interact with the manager where necessary.

What really annoys me is that FSA seems to think that we are basically too thick to understand when we're charged extra fees and too wimpish to complain about it - or even to avoid investing in the fund because the charges are too high. :mad:

It thinks we are just a load of sheep who don't need to be given any real information about what's going on - better that it's just sorted out behind the scenes by some "representative".

No wonder people are dumping financial products in droves.

carnet

They might be considered "sneaky" by some people, although show me a sector of commerce where these things don't go on .

Surely the point is that if the average fund investor, by going through a discount broker/Fund Supermarket, can buy funds at a typical IC of 0.25% instead of the "usual" IC of 5.25% and thus "save" 95%, they will have little or no interest in the TER whatsoever, never mind what it comprises.

paul666

they will have little or no interest in the TER whatsoever, never mind what it comprises.
Oh come on! TER can be critical to long term growth.

M&G still have a headline rate of 0.3 on their tracker and a TER of ~0.5% 'hidden' in a very different part of the web site. I find it difficult to believe this isn't deliberate and M&G must be getting many more customers on this basis.

Kudos is due to fidelity who are very upfront, putting their TER right next to their AMC
http://www.fidelity.co.uk/direct/select/fidelity/moneybuilder/mtlanding.html

Transparency, Simplicity, Honesty imagine that.

carnet

I'll concede that TER's will be of some importance to investors in passive trackers who anticipate holding these for the long term - whilst maintaining that the vast majority will not even give them a thought.

However for the active fund investor, who will be in and out of funds on a regular basis, charges are certainly not the top consideration - if I have to pay even 2% more for a fund which I consider may deliver outperformance far greater than the extra cost involved I would not (and do not) hesitate to do so.

By and large, with investment funds, as with any other service, you get what you pay for.

EdInvestor

Anyone who thinks charges don't matter should take a look at the FSA's charges tables for any financial product and see the shocking amounts that even a 1% charge adds up to over the long term - tens of thousands of pounds are lost. Check it out.

https://www.fsa.gov.uk/tables

cloud_dog

I think some might be concerning themselves too much about the detail, rather than the general presentation, i.e. you are looking for funds of a particular type / region, have found two that have similar strategies, performance, you then look at the TER and choose the one with lowest charges.

Yes, I know its simplistic but to be useful to everyday punters it needs to be simple.

carnet

I currently have a fund portfolio of some 32 funds with, probably, over a 50% annual turnover, so I am switching on a regular basis.

For the active fund investor there are many considerations to be taken into account when picking funds eg size of fund, fund management group, historical performance vis a vis current fund manager, sector, geographical area/spread, investment objective, currencies, economic outlook, asset class etc. etc.

Yes costs do enter into it but it is rare (for me, at least) to find two funds with identical plus points and different charges, so making the choice on a cost basis alone seldom occurs. The main thing is first to identify your fund through rigorous research and then to search for the cheapest place to buy it.

If I find a fund which meets all my criteria but has, say, an annual management charge of 1.75% as opposed to the industry norm of 1.5% - or even one where the IC is 2% instead of 0.5% I will seriously consider investing into it if I think that it has a better than average chance of outperforming both its benchmark and its peers.

If one can achieve even a 5% outperformance (and very often much more) I am not going to be overly concerned with having to pay 0.25% more in AMC's or even 1.5% in IC's.

Of course, for "buy and hold" investors, investing into perhaps 3 or 4 mainstream funds or, especially, into passive trackers, costs should be a major consideration.