Behind the PRIPSS curtain

S

Steven Barrett

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The PRIPSS regulation has made life companies disclose their charges on investment business. For some reason it doesn't apply to pensions but I think it is fair to assume the same costs.

I was looking at the fees for the Consensus fund of a product that advertises an AMC of 0.4%.

Entry cost: 0.86%
Portfolio transaction costs: 0.17%
Other ongoing costs: 2.78%

That's 3.81% in year 1 and 2.95% thereafter!!

I've had a look at some of the other providers and the total charges are around the 2% range for most funds. Some of the life companies have made these documents difficult to find, so I can't comment on all of them yet (it is a legal obligation to provide these to clients, so why are they buried in their website).

Interesting to see the costs of funds


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Hi Steven,

Could you explain the basics a little more. Are you saying that the AMC is not 0.4% as advertised but 3.81% in year 1 and 2.95% thereafter. If so how can they get away with that .

Or are they different charges ? Are they additional ?
 
This requirement is only out since Monday. Life companies have to give a breakdown of all costs as well as other information for investment business. All Key Information Documents have to have the same format Europe wide.

They have to break down costs into three categories:

One off costs - entry costs & exit costs
Ongoing costs - Portfolio transaction costs & Other ongoing costs
Incidental costs - Performance costs & carried interests

I spoke to one consultant who told me that an assumed advisor fee is included in these costs but I don't see any disclosure of that and other documents I've read said advisor fees may be on top of this.

We always knew that the amc advertised was not the true cost of the fund but from what I had been told, it was more at the lower end than the higher end. I am really shocked at the high level of fees on these contracts.

Looking at another fund, I can get it for 0.83% on a platform yet an insurance company is charging 2.95% for the same fund!

I am looking into how allocation rates are treated in these disclosures as they do not state on their documentation.

How do they get away with it? They are allowed to. I would also imagine that the cost of allocation rates has something to do with it too.



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Hi Steven

I think you might be guilty of comparing apples with oranges here.

Costs are expressed in a PRIIP's KID as an annualised reduction in yield (RIY) figure (i.e.. an estimate of the impact of investment costs (including management charges) on the return that an investor would otherwise receive).

Leaving insurance products to one side (where things are complicated by allocation/commission structures and potential exit charges), these are the relevant figures for the oldest collective of them all - Foreign & Colonial Investment Trust plc:-

Stated management fee (AMC): 0.365%
Total Expenses (TER): 0.54%
Ongoing Charges (per AIC guidelines): 0.79%
RIY (per PRIIPs KID): 1.06%

The RIY figure, in turn, breaks down as portfolio trading costs of 0.08% and other ongoing costs (including the AMC and other service provider (audit, legal, etc.) fees) of 0.98%, with no one off costs (no commission paid by the investment trust to intermediaries as shares are bought by investors on the secondary market) and no incidental costs (no performance fees).
 
Thanks Sarenco

I was comparing apples and oranges. Still, an RIY of 2.95% for a consensus fund is pretty high

I'm still have to find out how they have treated things like allocation rates etc on these documents. Any advisor fees are not included in the KID documents provided either as there are so many variations.

Insurance companies held webinars last year on PRIIPS but didn't get right into the detail of the figures.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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Hi Steven,

Can you help me understand this better please?

Say we take a passive fund tracking, for example, the S&P (or something similar):

- what is the stated RIY in such a fund; and
- how does this RIY relate to observed experience (i.e. the drag between the performance of the fund and the matching index).
 
Hi Dan

The thing is a mess. I have been on to life companies looking for answers. I was looking at one fund, two different contracts. The RIY on the "cheaper" contract is higher than on the more expensive contract. I don't know if the higher allocation rate on the higher one is a factor or not.

So the RIY on a passive fund will vary depending on the contract structure you have as well as the insurance companies costs of running the fund.

All the KID's are in the exact same format which is Europe wide but I need to find out what exactly makes up all these charges.

I probably jumped the gun in starting this thread but I was shocked by the high RIY on what is supposed to be a low cost fund!

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks Steven,

A bit of a six-marker all right!

You certainly shocked me with the scale of the RIYs! The levels you are talking about are definitely RAGEOUS, probably OUTRAGEOUS! So much so that I really am finding them hard to believe.

Part of my question was that - say a passive fund was tracking the S&P and say over a certain timeframe the returns of the S&P were, for example:

- Index return of 5% p.a.
- Index return plus dividends re-invested of 6.5% p.a.
- Index return plus dividends re-invested less withholding tax of 6% p.a. (I think in the case of US funds the with-holding tax is with-held??)

In any event, you arrive at a return figure that should emerge if the fund perfectly tracks and pays whatever taxes are due - in this instance, say 6%

If we then compare the matching passive fund against its benchmark return - are we really seeing gaps in excess of 2%? For the avoidance of doubt, I'm talking about fund unit prices only not any other contract charges/terms.
 
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Using FE Analytics, I ran the S&P 500 versus S&P 500 with a 2% annual charge. I've uploaded the pdf but I'm not sure if I did it properly.

Now, there are always going to be charges. Vanguard or Blackrock don't do it for free and you have to pay your platform provider (degiro do a lot of them for free?! How are the making money providing a free service?).

I suspect allocation rates have an impact on these RIY that is being reported in these KIDS. Life companies still haven't come back to me with answers to questions.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 

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Steven, Dan

I came across this FAQ document from Friends First that I thought was pretty helpful in terms of explaining the breakdown of the RIY of 1.88% on a cash fund under a particular investment plan. Essentially, it's the projected impact of the insurance premium levy, a management fee of 0.75%, an additional "plan management fee "of 0.25%, plus a maximum trail commission of 0.75%.

The RIY on an indexed US Equity Fund under the same investment plan is 2.07% - a difference of 19bps.

https://www.friendsfirst.ie/wp-content/uploads/PRIIPs-KIDS-and-Friends-First-QA.pdf

An allocation rate of less than 100% on an insurance product would be reflected as an "entry cost" on the KID.
 
Good stuff Sarenco, thanks for posting that, it's a very useful breakdown.

Transposing it to a pension contract, the entry charge won't apply as it is only on investments (I don't use life companies for investments. The provider I use is subject to MiFID II, not PRIPPS, so different and better levels of disclosure).

It says in the FAQ that 0.75% of the ongoing cost is trailer commission. Yet their KID document states:

Costs over time
The person selling you or advising you about this product may charge you other costs. If so, this person will provide you with information about these costs, and show you the impact that all costs will have on your investment over time.
Click to expand...

I would expect that no advisor fees are factored into the ongoing costs. I spoke to another consultant who think his life company have factored in an ongoing advisor fee of 0.5%. I must ask them all what assumptions they have used.

It still doesn't explain the fees on the Consensus Fund on the Non Financed Investment Contract. This is the 0.4% amc, €120 pa policy fee contract the have. The allocation rate would be 100% for a €10,000 premium. SSGA run the fund, so they are obviously charging for it too but still...

https://www.friendsfirst.ie/wp-content/uploads/active/Active/FUND_ZSSS355_616.pdf


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Sarenco & Steve,

Sarenco's post makes complete sense - if I'm reading this right - the RIY after stated charges, taxes and levies is pretty minimal - i.e. in the cash fund it's equal to

1.88% less 1.75% (i.e. 0.13%) less the whatever the ascribed annual equivalent is attributed to the insurance levy?

Am I on de ball here?
 
SBarrett said:
It still doesn't explain the fees on the Consensus Fund on the Non Financed Investment Contract. This is the 0.4% amc, €120 pa policy fee contract the have. The allocation rate would be 100% for a €10,000 premium. SSGA run the fund, so they are obviously charging for it too but still...
Click to expand...
Well, where the ongoing distribution costs are unknown, the RIY figure must assume that the maximum amount will be paid out of the PRIIP (would this be a 0.75% trail commission?).

Similarly, if there's a possibility that an additional advisory fee will be paid out of the PRIIP, that must be incorporated in the calculation.

There is also a significant entry cost (0.86%) shown for that product - are you sure there's 100% allocation?
 
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