New PRSA - Davy select execution-only with ETFs?

[martin]

I've been reading the forum for quite a while now, but this will be my first post. Hi!

Having moved to Ireland relatively recently, I'm looking to set up a PRSA. I'm relatively young (early 30s) so I have a long time horizon, and I won't be investing any particularly big sums initially. I'll continue putting money into this though, of course. I'm in decent employment, but my employer doesn't have any pension plans, so it's left to me to set something up.

I don't believe that actively managed funds can "beat the market" to such a big extent, and over as long time periods as I'm looking at, that they're really worth the additional charges that they cost. Instead, ETFs are interesting; cheap, and I'd imagine that as long as they're sufficiently broad, they should also be reasonably safe, considering the long time spans.

As far as PRSA providers go, having looked at a bunch of different ones, I'm currently leaning towards Davy Select's execution-only PRSA (100% allocation rate, 0.75% AMC (+ the cost of the ETFs themselves - I think this will be 0.15%, but will need to verify)). It's a non-standard PRSA, which makes me feel slightly uncomfortable, but my understanding is that standard PRSAs won't offer ETFs. Assuming that the costs of the ETFs themselves are not too crazy (which I'll need to verify), the overall cost should be ok, I think. Their availability of funds and platform seem good, and I was impressed by the person I spoke on the phone with.

Basically, I'd like some general feedback on this. Does it sound ok? Is there some alternative PRSA provider that may be better which I should check out? Any feedback and advice at all would be very welcome.

 

[Gordon Gekko]

My issue is that you will be picking the ETFs. That in itself requires expertise.

Personally I would opt for a standard PRSA with someone like Zurich Life and stick it all into a managed equity fund. If you shop around, you should be able to get 100% allocation and a 1% management fee.

 

[Marc]

I always sympathize with these questions. Having moved to Ireland myself I know first-hand the frustrations associated with trying to find a cost-effective pension solution.

To start with PRSAs are among the most highly regulated pension products in Ireland and are subject to a number of provisions designed to improve consumer protection but which in practice can result in some bizarre consequences.

For example, we recently debated with a PRSA provider their decision to report in the Statement of Reasonable Projection (SORP) the highest cost fund as the assumed cost of a portfolio for projections in order to comply with the pension regulations.

What this means in practice is that if a portfolio holds a number of funds with fees ranging from 0.15% to say 1%pa with an average of say 0.30% the PRSA provider reports to the investor that the fund management charge for their pension is 1% (the highest fee) rather than the actual cost of the portfolio. When we pointed out that we are able to provide an individual portfolio cost for each investor we were told that the PRSA provider's systems could not cope with this. So remember that when you receive your Statement of "Reasonable" Projection.

PRSA providers operate a form of cartel pricing with the most competitive products now costing 0.5%pa including having an Independent Custodian. I wrote a piece in the Sunday Business Post when Custom House Capital blew up stressing the importance of having your pension trustee separate from your custodian.

Then you need to consider the differences between using Exchange Traded Funds (ETFs) and Mutual Funds

When you buy an ETF you must use a broker to execute. You are going to have to pay a dealing charge each time you buy and sell and a bid offer spread and if you don't buy a Euro share class, you are going to have to pay a Foreign Exchange fee as well.

FX is still unregulated so you can end up paying as much as 4% to change your currencies on your "low-cost" execution platform.

Also, if your broker charges a minimum fee for each trade (as many do) then these are going to add up substantially for a small pension with regular contributions as you will hit the minimum fee each time you add to the pension.

I also think you are being extremely optimistic on your estimate of charges - a bond ETF might cost 0.15% but you would be unlikely to be able to build a decent balanced portfolio at that cost in Europe.

The alternative is going to be to use Mutual Funds.

The more sophisticated platforms don't charge for dealing in Mutual Funds irrespective of the size of the transaction so this can result in substantial cost savings over time.

However, you also need to watch the share classes that you are being offered and be aware that some fund managers will not be available to retail investors or will impose very high minimum investments. For example the minimum investment into the Vanguard Institutional Plus Fund range is €200 Million per fund.

Many fund managers now prefer to deal with a small number of institutional investors rather than a large number of retail investors and price their funds accordingly.

Hope that helps

 

[martin]

Thank you both for your replies! I hope that you don't mind if I have a few questions following your post.

PRSA providers operate a form of cartel pricing with the most competitive products now costing 0.5%pa including having an Independent Custodian. I wrote a piece in (link) when Custom House Capital blew up stressing the importance of having your pension trustee separate from your custodian.

Could you give examples of the products that are at 0.5%? I fully agree about the importance of keeping finance advice independent from the units that provide the funds. Commission-based advisors and the like have an enormous conflict of interest.

Then you need to consider the differences between using Exchange Traded Funds (ETFs) and Mutual Funds

When you buy an ETF you must use a broker to execute. You are going to have to pay a dealing charge each time you buy and sell and a bid offer spread and if you don't buy a Euro share class, you are going to have to pay a Foreign Exchange fee as well.

FX is still unregulated so you can end up paying as much as 4% to change your currencies on your "low-cost" execution platform.

Would it be fair to say that since I'm looking at very long time horizons, these concerns are lessened somewhat? Not that I'm underestimating the effect of these initial charges, but I'd imagine that for my time periods, the annual charges would be more important?

I also think you are being extremely optimistic on your estimate of charges - a bond ETF might cost 0.15% but you would be unlikely to be able to build a decent balanced portfolio at that cost in Europe.

Thanks - it's something that I'd need to look into very carefully before actually selecting funds, absolutely. I haven't been able to get an actual list of available ETFs and their terms before signing up, so it's something that I'd need to look at after (and then decide whether I'd need to go somewhere else if it's too expensive).

The alternative is going to be to use Mutual Funds.

The more sophisticated platforms don't charge for dealing in Mutual Funds irrespective of the size of the transaction so this can result in substantial cost savings over time.

Would it be fair to say that while the trades themselves may not be charged, the yearly AMC charges typically may be higher than for (index-tracking) ETFs? Other than the lower trading charges, would you say that they offer any significant benefits over said ETFs?

Hope that helps

It did, thanks .

 

[Gordon Gekko]

My understanding is that around 90% of returns are determined by initial asset allocation. How are a broker or an individual client tooled up to make the right calls?

 

[Steven Barrett]

That statistic compares how having the right asset mix drives most of the returns compared to other factors such as Security Selection and Market Timing.

When it comes to asset allocation, it is impossible to know who the top performer will be on a consistent basis. There are plenty of tables in circulation of the top 20 performing asset classes over the last 15/20 years. There is no pattern at all to them. That is why I adopt a diversified approach for my clients portfolios. I don't pretend that I know who the top performing asset class will be, have a diversified portfolio and you get a bit of everything. Afterall, it's all about long term growth, not making a quick buck!

Steven
www.bluewaterfp.ie