Hi Kateball,
I spoke with Ciaran O'Donoghue, Managing Director of Davy Select today and he confirmed that there are no charges applied to dealing in managed funds.
They do of course apply a dealing charge to exchange traded investments such as stocks, shares and Exchange Traded Funds.
As you point out the website does include the following in respect of investments in funds:
"Investment funds charge a range of fees within the fund, including but not limited to investment management fees, trustee fees, administration fees, and legal fees. These fees are accrued in the calculation of the NAV. You should read the relevant Fund Prospectus for fee information on any fund that you may be interested in."
To be fair to Davy here they are only disclosing the fact that investment funds include these costs and they are deducted in addition to the Davy administration charge.
The mistake many people seem to make is to assume that these funds are therefore more expensive than those offered by say an Irish Insurance Company.
This isn't necessarily the case. Irish funds are not required to disclose these fees (known internationally as the total expense ratio or TER) but you can be sure that you are paying more than the annual fund management charge that is quoted. You just don't know how much more and they are not required to tell you. Under these conditions who are you more willing to trust?
Recently Morgan Stanley estimated that the average TER across Europe was 1.91%pa for an average actively managed equity fund.
According to research by Lipper Fitzrovia in the UK in January 2007 the average fee for multi-manager funds investing into equity funds is 2.2%pa and can be as high as 3%pa. Breaking this down further, the average inclusive TER for a fund of funds investing principally into externally managed equity funds was found to be 2.44%pa.
If you buy a fund through Davy select that is regulated by the european wide regulation*Undertakings for Collective Investment in Transferable Securities UCITS) then you should receive a Key Investor Information Document which amongst other things will tell you the total expense ratio, risk rating of the fund and other helpful information. You will also be able to obtain a prospectus document and audited reports and accounts. Finally, you will be able to access an independent fund research service such as Morningstar and be able to compare funds.
However, this isn't the end of the story when it comes to fees in Investment funds.
An additional cost of investment which is often overlooked by investors and their advisers is the impact of trading within a portfolio. Perhaps the easiest way to think of this is that every time a fund manager buys an Irish Stock, a Stamp Duty of 1% applies to the purchase. Therefore, the more “active” the fund manager is at trading stocks, the more the fund has to pay in expenses such as stamp duty and brokerage commissions.
I have reviewed several studies into these additional hidden costs associated with portfolio turnover. Trading stocks within any fund (even an index tracker or ETF) creates additional costs such as stamp duty, broker commissions etc. These additional costs are also born directly by the investors in the fund and are not included in the TER.
A study in the UK by the Financial Services Authority estimated that the additional costs for a typical fund turning over 80% of its holdings in a year could add an additional 1.44%pa in costs.
An 80% turnover might seem like a really high number and one might think unrealistic. But think about it this way, how else is an active fund manager going to justify their additional costs unless they are being "active".
Another Lipper Fitzrovia study into UK investment funds in 2007 concluded that the average turnover for a range of popular investment funds averaged 74.57%pa.
In conclusion, Davy Select is offering a way for investors to obtain a wide choice of investment options and they are offering a competitively priced service. I have no connection with Davy and no vested interest here other than an interest in ensuring that Irish investors have access to a wide choice of investment options at reasonable cost. Remember that I had this facility in the UK in the late 1990s. Ireland is only now playing catch up.
But as I stressed in my earlier post - choice isn't a good thing for everyone. Most investors pick funds on the basis of past performance, even though every fund advertisement has to tell you that it is meaningless as a method of fund selection.
Research from Morningstar confirms that the best predictor of future winning potential is cost. I.e the lowest priced fund is probably the "best".
http://www.morningstar.co.uk/uk/news/95449/High-Fees-Destroy-Bond-Fund-Performance.aspx
And finally, many people including most advisers in my experience do not fully understand the real cost of investing, issues like fund turnover are almost never reported and rarely discussed at presentations by fund managers - and I would know I've been going to these things for over 20 years.
Investors are paid for risk and from that they deduct their fees and expenses.
Objectively working out the right asset allocation to meet an investor's need, willingness and ability to take risk is a process that is best achieved by working with an appropriately qualified and preferably fee-based adviser. There are now nearly 200 CERTIFIED FINANCIAL PLANNING professionals in Ireland. That would be a good place to start.