Use of ETF's in Pension

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gnf_ireland

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Are ETF's more attractive for use in a pension fund, given their associated tax treatment as income in Euro domiciled cases. I assume this would not apply within a pension fund scenario

I would assume that the management charges of ETF's would be lower than most index funds, even passive ones.

Transaction charges may be an issue, but for once off contribution maybe not !
 
You can access ETF's through a pension. You have an additional layer of costs in that you have to pay the life co, platform provider as well.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
@SBarrett Thanks for confirming this. I had assumed this to be the case. I guess my question is are they more attractive in a pension fund due to their taxation arrangement, rather than outside of it ?
What level of 'life co/platform provider' costs would you assume is reasonable above the EFT cost itself (say 0.3%), for a comparison with a standard fund of say 1%
 
Who says a standard fund is charging 1%? That's the management fee charged by the insurance company. How much (if any) of that goes to the fund manager? Trading costs are deducted before the units are priced each day. With insurance companies, we just don't know the cost of running a fund. For example, you may pay 1% AMC for your pension and invest in property. The cost of running a property fund is close to 2%. Where is that disclosed? That is why people get annoyed that they pay 1% for cash funds. That 1% pays the insurance company to administer your fund, light & heat and profit.

You can pay a platform provider 0.4% AMC and whatever your fund manager charges on top. Complete transparency on charges.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
We have looked at this question in detail and concluded it simply isn't cost effective to use ETFs within an Irish Pension structure especially as it is now possible to purchase the equivalent mutual fund with no transactions costs.

Compare
IShares MSCI World UCITs ETF Total Expense Ratio 0.50%pa
Plus dealing costs to buy and sell

Vanguard Global Stock Market Index Fund (Institutional Plus) Total Expense Ratio 0.15%pa
No dealing costs
 
SBarrett said:
You can pay a platform provider 0.4% AMC and whatever your fund manager charges on top. Complete transparency on charges.
Click to expand...

Hi Steven

Can you elaborate on this somewhat? When you say "platform provider" are you referring to a life company, pension trustee or something else? Also, when you say "0.4% AMC" - is that the total hosting cost or is there another layer of costs (in addition to the underlying fund OFC and portfolio trading expenses)?

I continue to find it extraordinary that Irish life companies are not required to disclose the full OFC for unit-linked funds. The opaque pricing of units really should be addressed by the Central Bank at this stage.
 
Marc said:
We have looked at this question in detail and concluded it simply isn't cost effective to use ETFs within an Irish Pension structure especially as it is now possible to purchase the equivalent mutual fund with no transactions costs.
Click to expand...
Thanks Marc - clear response much appreciated
 
SBarrett said:
How much (if any) of that goes to the fund manager? Trading costs are deducted before the units are priced each day
Click to expand...
Sarenco said:
I continue to find it extraordinary that Irish life companies are not required to disclose the full OFC for unit-linked funds.
Click to expand...
Agree - a Total Expense Ratio for each and every fund would be very welcome and allow much greater transparency to people
 
Just to be clear, I am not asking for advance disclosure of future portfolio trading expenses. Nor am I asking for further disclosure of intermediary or broker commissions.

I am simply looking for disclosure of any hosting/platform costs and the ongoing fund charges -
based either on the previous year's expenses or, where relevant, based on an estimate believed on reasonable grounds to be indicative of the amount likely to be applied to the units in the year to come.

Is that too much to expect?
 
Sarenco said:
Hi Steven

Can you elaborate on this somewhat? When you say "platform provider" are you referring to a life company, pension trustee or something else? Also, when you say "0.4% AMC" - is that the total hosting cost or is there another layer of costs (in addition to the underlying fund OFC and portfolio trading expenses)?

I continue to find it extraordinary that Irish life companies are not required to disclose the full OFC for unit-linked funds. The opaque pricing of units really should be addressed by the Central Bank at this stage.
Click to expand...

Sure, no problem. I use ITC for self directed/ SSAS pensions. They provide the pension wrapper. Another company called Conexim provide access to the range of funds as well as direct investing(if you wish). Pershing Securities are used as your custodian and hold the money. The charge for the 3 of them is 0.4% of the value of your fund each year. Under that structure, you cannot purchase property directly, it is for funds and shares etc (access to over 3,500 funds).

You also have to pay for the fund that you invest in, the OFC. This will vary depending on the fund. A property fund could cost you 2% or you can go with an index where you will probably pay 0.25% per annum.

There are no enhanced allocation rates or commissions. If the broker's fee is paid from the fund, it is simply deducted from the money in the account. As they are not on the hook for paying commissions, there are no early exit penalties, so you can move your money whenever you want. You need to be putting in an initial premium of €20,000. If making monthly contributions afterwards, the minimum is €1,000 per month.

In fairness to insurance companies, a few of them are moving towards lower charges, more transparent structures. The OFC is still an issue though. In many contract structures, part of the fund manager fees are built into the AMC that you are charged. It's difficult to know what isn't though. They are quicker to set up too (if year end is approaching, setting up a self-admin structure will take too long).

Advisor fees are not included in any of the above.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks Steven - that's really helpful.

So the total ongoing cost to an investor that opts for an index tracker with an OFC of 0.25%, is 0.65% per annum - right?

Presumably you also need to get paid for your services!:) If it's not too rude to ask, do you typically negotiate an individual advisory fee for each investor or do you operate on a tiered % basis depending on the amount invested?

Also, do you (or can you) charge a "set up" fee for the above, separate and distinct from an (ongoing) advisory fee?

I suppose one of the other advantages of the typical life company pension structure is the comfort of the life co's balance sheet/reputation.

Somebody in the pension industry once told me that the true OFC for a policy linked to a developed market equity index fund would be around 10% higher than the disclosed AMC. Does that sound about right to you?
 
Yes, that's correct.

I have a tiered charging structure. The more money I have under management, the more I have to pay for indemnity insurance, levies etc, so it's not a once off cost to me to have money under my management. I charge a set up fee to cover the costs of investment strategy, implementation and compliance and an ongoing fee to provide advice on a regular basis.

The reason I use ITC/ Conexim is they use Pershing Securities as their custodian. When I was looking for a platform provider to use outside of the insurance companies, Custom House Capital was always ringing in my head. I couldn't use a smaller provider knowing my clients money was at risk. Pershing hold the clients money.

I also use insurance companies a lot too as the self directed isn't for everyone, especially if you haven't built up a decent sized fund yet.

Looking up the Ongoing Cost of a Global Equity Fund on Morningstar, they charge 1.52%. You can expect that level of charges for an actively managed fund.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Sarenco,
Did you see the piece I had in the Sunday Business post on mirror funds?

Zurich Japan Index Fund vs Nikkei 225 Index 10 years ending 17/12/15


Source: FE Analytics


Difference in total return 12.59% over 10 years ending 17th December 2015 (1.193%pa)
 
SBarrett said:
Yes, that's correct.

I have a tiered charging structure. The more money I have under management, the more I have to pay for indemnity insurance, levies etc, so it's not a once off cost to me to have money under my management. I charge a set up fee to cover the costs of investment strategy, implementation and
Click to expand...

Thanks Steven - the point about your own ongoing costs is well made.
 
Marc said:
Sarenco,
Did you see the piece I had in the Sunday Business post on mirror funds?

Zurich Japan Index Fund vs Nikkei 225 Index 10 years ending 17/12/15


Source: FE Analytics


Difference in total return 12.59% over 10 years ending 17th December 2015 (1.193%pa)
Click to expand...

Hi Marc

No, I missed that piece.

Can you work out the difference between the Zurich fund's AMC and OFC from the total return of the linked fund? The difference would obviously have a compounding impact over time.
 
So the reference in that case was the underlying Nikkei 225 Index which has no costs.
The (1.193%pa) is the annual compound difference between the Fund and the Index (which includes all dealing costs and tracking error against the index) so it isn't correct to say that it is the fund management cost but it certainly is the real cost to an investor.

This was my favourite direct comparison between two supposedly identical funds that we looked at was:


Aviva Irl Emerging Markets Equity Inc vs Aviva Investors Emerging Market Equity Inc (SICAV LU0280564351) 6 years ending 18/12/15


Source FE Analytics


Difference in performance 22.73% over 6 years ending 18th December 2015 (3.47%pa)

The Total Expense Ratio of the SICAV is 2.33%pa (source Morningstar)

Implied total cost of investment 5.8%pa
 
Marc said:
So the reference in that case was the underlying Nikkei 225 Index which has no costs.
Click to expand...

Thanks Marc but I'm really just trying to compare the cost of investing in a simple tracker through a life wrapper versus a self-directed/SSAS structure.

I now know that Steven's structure adds 0.4% to the underlying fund's OFC (which is probably around 0.45% for a fund that tracks the Nikkei 225).

If Zurich charge an AMC of 0.75% for their wrapper then that wouldn't appear to be any more expensive than Steven's structure (assuming the OFC doesn't exceed the stated AMC by 10%).

I am also assuming that Steven's on-going advisory fee would equate to what he charges by way of commission for organising the life wrapper.

Happy to be corrected.
 
A simple comparison:

AMC of 0.4%
OFC of 0.45%
Growth before charges of 6%
€1,000 a month invested over 30 years
Fund of €855,728


AMC of 0.75%
OFC of 0.45%
Growth before charges of 6%
€1,000 a month invested over 30 years
Fund of €802,147

Difference - €53,581

This could be accurate or it may not as we don't know how much (if any) of that 0.75% charged by Zurich goes to their fund management team.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Thanks Steven but I'm not sure I follow.

Are you suggesting that the AMC charged by Zurich is in addition to the OFC of the linked tracker? Surely that can't be right.

My understanding was always that the AMC charged by a life company incorporated all fund management costs (including the costs of any underlying fund(s)) but did not capture the full cost of the wrapper as other costs (custody, audit, director fees, etc.) are also applied to the fund units.

Why would Zurich's fund management team receive any element of the charges? They're not managing the fund assets in this case.

The lack of transparency in this whole area is really ludicrous.
 
Ok I think this is what you are asking : for pensions let's use the 0.40% wrapper cost ( a PRSA is 0.50% and my SSAS is with ITC and Pershing and I only pay 0.34%pa) but 0.40% is a common fee structure for brokers in Ireland.

So the comparison for an investor is as follows (note that these are investment costs and are before advice costs are added)

using the reference of the Japan index investment

Zurich 1.193%pa
New Ireland 0.919% (same time period and from the same study)

Remember that if a broker adds an ongoing commission this is added to the cost.

Unbundled contract
trustee and custody 0.40%
OCF. 0.23%
Total 0.63%

If an adviser adds an ongoing fee this is added to the cost

I've used the Vanguard Japan Stock index fund eur institutional for the Comparison OCF which is a fair comparison as we have clients invested in Irish pensions in the fund.

Cost effective implementation is one of the key advantages of working with a really good adviser who are able to negotiate better terms for clients rather than just selling the retail version of a fund.
 
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