Request for Feedback on PRSA Investment Plan

Investor

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I recently helped a friend to set up a non-standard execution only PRSA with Davy Select, and was hoping to get some feedback on our implementation of the portfolio. (I’m not a fan of the Life Assurance companies, since so many of their funds are actively managed, opaque, and have all kinds of hidden costs.)

Here is the plan in outline:

STRATEGY

1. Euro cost average by making monthly contributions.

2. Commit to maintaining a diversified stock/bond asset allocation in low cost broad index based ETFs rebalanced annually.

3. Begin with an 80/20 stock/bond allocation, and reduce the stock allocation by 1% per year after reaching the age of forty-five when rebalancing the portfolio until the allocation is 60/40 at sixty-five.

IMPLEMENTATION

a. Stock ETF: Buy or sell Vanguard FTSE All-World UCITS ETF [ticker VWRL] denominated in euros on the Amsterdam Euronext Exchange once a year when rebalancing the portfolio. (Don’t buy it in sterling on the London Stock Exchange.) Since Davy charges a 0.10% fee and a €25 foreign transaction settlement charge per trade for each instrument listed outside the UK and Ireland, it is cost-prohibitive to buy VWRL monthly. So, as a workaround, buy iShares MSCI World SRI UCITS ETF [ticker SUSW]—a euro denominated global environmental, social and governance fund available on the LSE which tracks the MSCI WORLD SRI Select Index (which correlates quite closely with the MSCI World Index)—on the London Stock Exchange monthly instead, for which Davy levies no trading charges, and sell the entire position to buy VWRL stock ETF and/or AGGH bond ETF when rebalancing the portfolio annually.

b. Bond ETF: Buy euro-hedged iShares Global Aggregate Bond UCITS ETF [Ticker AGGH] on the LSE.

c. Perhaps consider diversifying further in the future when the portfolio has grown by assigning 10% of the stock allocation to a small-cap value ETF (for higher expected returns at the cost of extra volatility), 10% to a REIT (for inflation protection and added diversification), and possibly 5% to an Irish ETF (a little home bias may be behaviorally justified). There are not many euro-denominated choices available on the LSE, so the options to build a more complex portfolio are limited, and the ETFs listed below are small and thinly traded with large bid-ask spreads. Thus they’re not ideal, but there’s nothing else.
Small-cap value ETF: WisdomTree Europe SmallCap Dividend UCITS ETF EUR Acc [Ticker DFEA] (Note that this ETF tracks a fundamentally weighted index.)
REIT: SPDR® FTSE EPRA Europe ex UK Real Estate UCITS ETF (EUR) [Ticker EURE]
Ireland: WisdomTree ISEQ 20® UCITS ETF [Ticker ISQE]

d. Be prepared for a worst-case scenario loss of up to approximately 35%, but expect an annualized inflation-adjusted (i.e. real) return over time of approximately 4%.

NOTES

Assume a 70/30 stock/bond allocation. Then, ignoring ETF transaction costs such as bid ask spreads, market impact costs, and net asset value premiums and discounts, the approximate cost of ownership as a percentage of assets under management works out as follows:

(0.75% Davy annual dealing charge) + (0.25% VWRL ongoing charges figure x 0.70) + (0.10 AGGH total expense ratio x 0.30) = 0.955%.

The actual cost is a little higher because of the iShares SUSW ETF expense ratio of 0.30% and the once a year 0.06% + €25 Davy overseas charge to buy the Vanguard VWRL ETF, but the effect of these additional costs will diminish over time as the size of the portfolio and the bond allocation percentage increases. In short, over the lifetime of the PRSA, the cost of ownership should come very close to 1%, which is very high by international standards, but not bad for Ireland.

Any criticism of the above plan would be greatly appreciated...
 

EmmDee

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Not a criticism - more a potential alternative.

Have you considered using a platform such as Etfmatic. You can set the equity / bond balance and they auto invest into a model portfolio but you can adjust the components if you want to increase or reduce exposure to particular markets.

They charge 0.48% for accounts holding less than €25k and 0.29% for accounts greater than $25k. The underlying TER for the ETF's vary but my average TER is 0.12% at the moment giving total expense cost of 0.39%. There are no transaction fees. They also automatically reinvest and rebalance.

I don't know if you can access REIT's / property funds. They only transact ETF's.
 

EmmDee

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145
Do these funds accommodate Irish pension funds and if so, how?
If the account is opened in the name of the pension structure would it not work?

They also seem to have a B2B offering for financial advisors for larger scale activity
 

Marc

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We’ve been operating like this in Ireland for over a decade.

It’s perfectly possible for a pension trust to hold a dealing account. There needs to be some high level agreements between the trustees and the execution venue but once in place these are relatively simples.

I’ve been paying 0.25% for the pension trust and 0.09% for custody for the last few years.
 

Sarenco

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Bonds have no place whatsoever in a sub 45 year old’s pension fund.
I'm not sure I agree with this in every case.

@Marc told us on another thread that he has clients in their mid-40's that are already grappling with the €2m SFT. I don't think it would necessarily make sense for somebody in that position to maintain a 100% allocation to equities.

Also, I'm not sure it would always make sense for somebody in their mid-40's that is planning to retire their fund at 50 to maintain a 100% allocation to equities.
 

Investor

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@EmmDee and @Marc: Thanks for your replies. Although the Davy annual dealing charge of 0.75% is high by international standards for an execution only PRSA, my understanding (which could well be mistaken) is that while it would possible, as Marc points out, for a pension trust to open a dealing account with a low cost broker such as ETFmatic or DeGiro, the set up costs and ongoing management charges associated with a retirement annuity contract or a small self administered pension would be higher for small portfolios. (0.75% of €250,000 is €1,875, for example, so only if one’s pension pot were over €250K and the RAC or SSAP costs were under €1,875 per annum would it make sense to go this route.)

@Marc: Perhaps you could correct me if I’m wrong. You say you’ve been paying “0.25% for the pension trust and 0.09% for custody,” but what about initial set up costs and ongoing intermediary fees for a small individual investor? Is there a less expensive way for somebody who only wants to purchase ETFs DIY-style to open a personal pension account in Ireland than via a Davy PRSA? While I realize that there are administrative and compliance costs associated with PRSAs, and that other, larger jurisdictions benefit from economies of scale, from an execution only perspective the PRSA wrapper adds very little value, and the 0.75% annual dealing charge is frustratingly high when compared to the cost of an SIPP (Self Invested Personal Pension) in the UK or an IRA (Individual Retirement Arrangement) in the US, or to buying ETFs via a broker like DeGiro outside of a pension wrapper for that matter. Hopefully the advent of the PEPP (Pan-European Pension Product) will increase options and reduce costs for Irish pension investors...
 
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Investor

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@elacsaplau: Davy Select charges holders of execution only PRSAs 0.75% per annum to administer the account. The Vanguard FTSE All-World [stock] ETF has an expense ratio of 0.25% and the iShares Global Aggregate Bond ETF has an expense ratio of 0.10%. So if the asset allocation were 70/30 stock/bond, then the approximate weighted total annual fee would be about 0.75 + (0.25 x 0.70) + (0.10 x 0.30) = 0.955%. I hope this makes sense.
 

Investor

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@Gordon Gekko and @Sarenco: I agree that it could well be appropriate for an aggressive young investor with a relatively small portfolio and a long time horizon to have a 100% equity allocation, and historically low bond yields make fixed income assets particularly unattractive right now. That said, willingness, ability, and need to take risk vary widely even among individuals of the same age group depending on factors like emotional and intellectual makeup, stability of earned income, and accumulated assets. The S&P 500 index lost 56.78% of its value between 9 Oct 2007 and 9 Mar 2009, and many investors who were overweight stocks panicked and sold during that time. On top of that, there’s no guarantee that some future global drawdown won’t be more severe yet. Opinions differ, but I tend to trust Vanguard, and even their target date (lifecycle) retirement fund aimed at US eighteen to twenty-one year olds holds 10% in bonds.
 

Marc

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Competition in Ireland has made pension contracts more competitive in recent years.

Although a minimum fee applies to most contracts it’s now only €300pa (used to be €1000 plus vat) so competitive above €80,000pa

No minimum fee applies to PRSAs.
The wholesale cost of a PRSA is 0.5% so even if an annual advice fee of 0.25%pa is added it’s no more expensive than DIY and you’ll save on dealing and FX charges by avoiding ETFs
 
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Investor

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@Marc: Thanks so much for your helpful response! (And sorry for posting such a lengthy follow-up!) Perhaps I’m missing something, but unless there are additional hidden costs, it seems to me that if an individual Irish client could set up and continue to contribute to an RAC or a SSAP for only €300 per annum, then since €300 is 0.75% of €40,000, anybody with over €40,000 worth of ETFs in an execution only PRSA paying an annual management fee of 0.75% could save money by switching to an RAC or SSAP. Am I correct in so thinking, or is there more to it than that?

I take your point that a PRSA purchased via an adviser that charged a 0.5% annual fund management fee plus a 0.25% annual advisory fee would be no more expensive than a DIY PRSA as far as the annual dealing charge goes, but I do not want to avoid ETFs. My question is whether there is any way for a small individual investor in Ireland to make pension investments in ETFs less expensively than via Davy Select’s execution only service. I am uncomfortable with the funds offered by Irish life assurance companies for multiple reasons:

1. Opacity

Compared to ETFs, the life assurance funds are extremely opaque. Most seem to be actively managed, many are overly complex, and it is hard to dig up information on the fund managers. The passively managed funds often do not seem to specify which indexes or benchmarks they are tracking, and in any case appear to exhibit high tracking error relative to their mysterious benchmarks. There is no easy way to obtain complete information about the funds’ holdings, their historical volatility, or their turnover rates. Sharpe ratios are not provided, so it is impossible to assess portfolio efficiency. In short, life assurance funds make it very hard for the potential buyer to “look under the hood.”

2. Active management

All of the academic evidence points to the fact that over long time periods the vast majority of actively managed funds underperform broad index based funds, but most life assurance funds seem to be actively managed. In addition, many are not adequately diversified, and so may be subject to sector risk and style drift. And finally, given that as a small nation, we Irish seem to be particularly prone to the bandwagon effect, recently hot actively managed funds may suffer from asset bloat as a result of large inflows.

3. High costs

Active funds incur all kinds of internal transaction costs in addition to the management and advisory fees: brokerage commissions, bid ask spreads, and market impact costs associated with the buying and selling of securities. Perhaps the passive funds are less costly as a result of lower turnover rates, but there is no way to tell what kinds of hidden costs they might involve such as soft commissions (payment in kind arrangements to third parties) and cash drag (as a result of a permanent cash position needed to facilitate share purchases and unit redemptions). Once again, the lack of transparency puts me off these products.
 
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elacsaplau

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Thanks Investor for clarifying the investment charges. I admire your clear thought processes, analysis and writing style.

Best of luck in trying to get clear details of options regarding lower charges in Ireland!!

Perhaps I’m missing something, but unless there are additional hidden costs, it seems to me that if an individual Irish client could set up and continue to contribute to an RAC or a SSAP for only €300 per annum....
This would seem like a reasonable reading of what Marc wrote but...……...I think that when you press, you will find that such charges simply ain't available in isolation. [I've tried to do what you are trying to do many times in these here parts - always to no avail!!] I shall watch with interest!!
 

Investor

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@elacsaplau: Thanks for the thumbs-up! It’s very kind of you, and it’s good to know I’m not alone. I realize that it’s by no means free for PRSA providers to offer the products that they do; there are numerous regulatory, operational, execution, and custodial expenses that providers incur, but the charges that the Irish financial services industry levies still strike me as disproportionate. (I hope I’m wrong, but I suspect that, like yours, my attempt to get clarity on costs may be to no avail too.)

Suppose, to take an artificially simplified example, that somebody on the median Irish salary of about €37,775 was to put (a high but recommended) 15% of their income into a PRSA over 40 years at an average annual real return after expenses of 4% (which may be a bit optimistic in light of current high security valuations). After 40 years of contributions, they’d have amassed €558,110, and on top of the expense ratios of the funds they were holding, they’d then be paying Davy a whopping €4,186 a year not to manage their portfolio in any hands-on way, but simply to hold their assets and to facilitate a few online trades.

And if and when they converted their PRSA to an ARF (Approved Retirement Fund), the annual dealing charge would rise to 0.90%, so they’d have to pay Davy €5,023 a year. Assuming a safe withdrawal rate in retirement of 4% (or €22,334 in year one), the stockbroker’s annual income from the portfolio of 0.9% of assets under management would come to 22.5% of the investor’s, which doesn’t seem like such a great deal to me—at least not from the perspective of one party to the agreement! Surely somebody in the industry should be able to make Irish consumers a better offer than this, and still make a profit for themselves.

To say it again, hopefully the impending arrival of the PEPP (Pan-European Pension Product)—or maybe even the government’s proposed new Automatic Enrollment Retirement Savings System—will improve the landscape for the ordinary Irish retail pension investor. In the meantime, we’ll have to keep pushing for more competition and more openness and just wait and see what happens...
 

Marc

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@Marc: Thanks so much for your helpful response! (And sorry for posting such a lengthy follow-up!) Perhaps I’m missing something, but unless there are additional hidden costs, it seems to me that if an individual Irish client could set up and continue to contribute to an RAC or a SSAP for only €300 per annum, then since €300 is 0.75% of €40,000, anybody with over €40,000 worth of ETFs in an execution only PRSA paying an annual management fee of 0.75% could save money by switching to an RAC or SSAP. Am I correct in so thinking, or is there more to it than that?

I take your point that a PRSA purchased via an adviser that charged a 0.5% annual fund management fee plus a 0.25% annual advisory fee would be no more expensive than a DIY PRSA as far as the annual dealing charge goes, but I do not want to avoid ETFs. My question is whether there is any way for a small individual investor in Ireland to make pension investments in ETFs less expensively than via Davy Select’s execution only service. I am uncomfortable with the funds offered by Irish life assurance companies for multiple reasons:

1. Opacity

Compared to ETFs, the life assurance funds are extremely opaque. Most seem to be actively managed, many are overly complex, and it is hard to dig up information on the fund managers. The passively managed funds often do not seem to specify which indexes or benchmarks they are tracking, and in any case appear to exhibit high tracking error relative to their mysterious benchmarks. There is no easy way to obtain complete information about the funds’ holdings, their historical volatility, or their turnover rates. Sharpe ratios are not provided, so it is impossible to assess portfolio efficiency. In short, life assurance funds make it very hard for the potential buyer to “look under the hood.”

2. Active management

All of the academic evidence points to the fact that over long time periods the vast majority of actively managed funds underperform broad index based funds, but most life assurance funds seem to be actively managed. In addition, many are not adequately diversified, and so may be subject to sector risk and style drift. And finally, given that as a small nation, we Irish seem to be particularly prone to the bandwagon effect, recently hot actively managed funds may suffer from asset bloat as a result of large inflows.

3. High costs

Active funds incur all kinds of internal transaction costs in addition to the management and advisory fees: brokerage commissions, bid ask spreads, and market impact costs associated with the buying and selling of securities. Perhaps the passive funds are less costly as a result of lower turnover rates, but there is no way to tell what kinds of hidden costs they might involve such as soft commissions (payment in kind arrangements to third parties) and cash drag (as a result of a permanent cash position needed to facilitate share purchases and unit redemptions). Once again, the lack of transparency puts me off these products.
You should want to avoid ETFs and I’m not suggesting that the alternative to Davy select is a life wrapped product.

You can invest in UCITS with the same degree of transparency as an ETF.

The clue is in the name - Exchange traded

You have to pay brokerage commission, bid offer spreads and potentially FX charges and foreign exchange fees.

Don’t confuse ETF = passive and therefore good and fund = active and therefore bad

You could invest in passive funds and avoid the dealing charges in ETFs was my point.

As a jumping off point we pay 0.15% for global developed equities 0.22% for Emerging market equities - what is the OCF of the equivalent retail ETF?
 

EmmDee

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145
A lot of ETF's are UCITS. I have a portfolio of ETF's and they are all UCITS. The TER varies but as an example.... the "equity ex UK" has a TER of 0.12%. The UK ETF has a TER of 0.07%. Emerging markets is the highest at 0.25%.

Even though "exchange traded", they are not the same as closed ended funds. There isn't a bid / offer like a standard equity with additional broker charges. The dealing price is determined by the Net Asset Value calculation.

As mentioned above I pay a custody / account fee of 0.29% pa and no dealing charges.
 

Investor

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@Marc: Thanks for your response.

I’m not sure, notwithstanding the associated costs, that I should want to avoid ETFs. Despite my espousing a buy and hold approach, I find the liquidity that many ETFs provide reassuring. Bid ask spreads on large and heavily traded ETFs typically amount to a mere 5 to 10 bps (basis points), and since they are only incurred when one places a trade, they have a negligible effect on buy and hold investors. Brokerage commissions and overseas charges can be a problem, but only because Irish brokers in general are such bad value. DeGiro (although their platform design encourages frequent trading, presumably in the attempt to “make it up on volume”) charges only €2.00 + 0.038% for ETF trades anywhere in the world. Finally, as for foreign exchange fees, there is such a good selection of ETFs with euro share classes that I see no reason to pay them unless one is trying to avoid overseas charges by trading in sterling on the London Stock Exchange, and again, even then, DeGiro charges only a very reasonable 10 bps. (One other potential issue with ETFs that you don’t mention is that listed prices may diverge from net asset values, but with large and highly liquid funds, this is rarely a problem.)

The 0.15% for a global developed equities fund that you mention certainly sounds good, but there are funds and funds. Vanguard’s FTSE All-World UCITS ETF (VWRL) has an OCF of 0.25%, but it holds 3,265 large and mid cap stocks in developed and emerging markets and has a turnover rate of only 1%. (Unfortunately small caps are not included in the index it tracks.) Most impressively, since its inception in 2012, VWRL has returned 10.23% compared to a return of 10.22% on the FTSE All-World Index, so it has actually beaten the benchmark it tracks (albeit only by 1 bp), and thus effectively has an OCF of minus 0.01%! Vanguard makes up for its OCF by utilizing the transactional skill of its index fund managers to exploit economies of scale in trading, and by passing on the returns from securities lending to its fund holders.

You say one can invest in UCITS funds with the same degree of transparency as ETFs. If so, perhaps you could provide me with details of the equities funds to which you are referring, and direct me to where I can obtain KIDs, fact sheets, and prospectuses...

Please allow me to try again for a specific confirmation with another worked example. (@elacsaplau: Perhaps this may be of interest to you.) It would take a person on the median full time Irish salary of about €37,775 investing 15% of their income at a real net return of 4% per annum nearly 8 years to accrue a balance of €50,000 and nearly 14 years to accrue €100,000. Assume a 75/25 stock/bond asset allocation. Then, to a very close approximation, the cost of a Davy execution only PRSA invested according to my plan in the original post above is given by the following formula:

(0.75% dealing charge) + (0.25% stock ETF OFC x 0.75) + (0.10 bond ETF OFC x 0.25) + €30 overseas charge​

Case 1. At €50,000 this works out to €375 dealing charge + €93.75 stock fund OFC + €12.50 bond fund OFC + €30 overseas charge = €511.25 or 1.02% of AUM (assets under management). If one factors in Vanguard’s benchmark beating performance by subtracting the stock fund OFC, then it’s €417.50 or 0.83% of AUM.​

Case 2. At €100,000 it’s €750 + €187.50 + €25 + €30 = €992.50 or 0.99% of AUM, and €805 or 0.81% of AUM subtracting the stock fund OCF.​

My question once more is whether any Irish pension provider can offer the small retail investor a better shake than this.
 
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Investor

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@EmmDee: ETFmatic sounds like the best roboadvisor platform for taxable investment accounts; for DIY investors with a portfolio of over €20,000 making 24 trades a year (one global stock and one global bond ETF a month), DeGiro is a little cheaper at €2.00 + 0.038% per ETF trade and with no annual AUM fee. The larger one’s portfolio becomes, the cheaper DeGiro gets relative to ETFmatic, as the absolute amount of the 0.29% fee increases, whereas the DeGiro fee per trade stays the same given level contributions. (Annual rebalancing might drive up DeGiro’s cost just a little.) That said, I agree with you that 0.29% is good value for a good roboadvisor, and it may well be worth it to some investors. The problem is that—to my knowledge anyway—there is nothing comparable that is easily available for Irish investors in a tax-sheltered pension wrapper, and the tax treatment of ETFs in Ireland is punitive.
 

EmmDee

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@EmmDee: ETFmatic sounds like the best roboadvisor platform for taxable investment accounts; for DIY investors with a portfolio of over €20,000 making 24 trades a year (one global stock and one global bond ETF a month), DeGiro is a little cheaper at €2.00 + 0.038% per ETF trade and with no annual AUM fee. The larger one’s portfolio becomes, the cheaper DeGiro gets relative to ETFmatic, as the absolute amount of the 0.29% fee increases, whereas the DeGiro fee per trade stays the same given level contributions. (Annual rebalancing might drive up DeGiro’s cost just a little.) That said, I agree with you that 0.29% is good value for a good roboadvisor, and it may well be worth it to some investors. The problem is that—to my knowledge anyway—there is nothing comparable that is easily available for Irish investors in a tax-sheltered pension wrapper, and the tax treatment of ETFs in Ireland is punitive.
ETFmatic don't withhold tax. I need to declare income and gains in my annual form and pay the liability. On the plus side, if the account is opened by a tax exempt entity, it would receive the gross income and gains so should work.

Your analysis on volumes of trades and costs might be more relevant for you - my portfolio is rebalanced constantly so in my case I'd rather have zero transaction costs. It all depends on what suits you best
 

Marc

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I find this subject fascinating because I am caught between several mutually exclusive goals.

For example let’s start with Regulation.
The costs associated the Anti money laundering and Know your client have gone through the roof recently and all these costs are being pushed onto consumers.

Simultaneously consumers are looking to digital channels to provide more cost effective solutions and to be clear I’m on your side with this one having campaigned for the last decade for greater transparency and lower costs in Ireland.

Yet I frequently take a negative barrage of abuse from some posters on here seemingly for not providing my services for free.

I’m fairly sure I’m entitled to make a reasonable profit.

So, yes, I could improve on the cost of a pension in Ireland but on a €40,000 account I’d be making about €100pa.

By my very rough calculations it would be several years before I saw any profit given the high costs associated with on-boarding a new client - yes, even one who “knows exactly what they want”

So naturally there has to be a fee paid upfront to reflect the time to meet these regulatory requirements but also to reflect the added value.

To turn the question around. If I can significantly reduce the ongoing charges why should all that benefit accrue to the investor?

So what would be a reasonable up front cost to pay to set up a pension with lower ongoing charges?
 
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