Reducing Expat Investment Costs
The array of funds available can be confusing, and as many places still allow fund sales in return for commission, it's difficult to know if the funds being recommended are in your best interests. Here is our guide of things to look out for to help you make an informed decision on your investments.
Funds often have multiple 'share classes', each with different fees. Cheaper 'institutional' options are for larger investors such as fund managers, whilst 'retail' investors can pay more. It's the retail sector where hidden incentives for advisors exist, making funds more expensive and reducing returns.
Following the introduction of the UK's Retail Distribution Review (RDR) in 2013, advisors abandoned commission-based sales and started to provide clarity over how clients were charged. Many overseas markets are years away from RDR type regulation, potentially exposing investors to higher charges.
Back-end Loaded Funds
'Clean' share classes are cheaper and least restrictive, i.e. free to enter and exit with lower running costs. Some have upfront fees which are visible while others pay trail payments to advisors through increased running costs.
One way of unknowingly paying commission is the 'back-end load', funds which are free to enter but incur exit charges before a specified period. Advisors receive a 4% commission funded by exit fees that start at 5% for withdrawals in year 1, reducing by 1% per annum to zero after 5 years. So, selling a $100,000 fund purchase in the third year would incur a $3,000 exit fee deducted from the balance.
Fees are a crucial consideration as published annual management charges (AMC) don't always show the full costs. The 'total expense ratio' (TER) and 'ongoing charge figure' (OCF) matter as these include any fees paid to advisors and show more accurately how returns will be affected.
The Effect on Performance
Below are examples of the different share classes of expensive fund, the GAM Asset Management Star Balanced Fund. We do not recommend this fund but it's a good example to show how high fund charges can affect your returns and the difference between share classes, with the OCF's boxed in red. (source Trustnet).
The costs vary from 1.3% to 3.09% per annum, a difference of 237%. The graph below shows the performance of 3 share classes over a 3 year period. The difference between 'Z' and 'C' in the first year is 1.8%, rising to a huge 6.6% over 3 years, creating differences in annualised returns of between 6.13% and 8.33%, or 2.2% per annum. (Source Trustnet)
A $100,000 investment in each fund would create returns of $181,293 and $222,580 respectively over 10 years, a difference of $41,287 and not including any initial charges paid on entry. So it's clear why advice can be so valuable.
The best results are often achieved by using 'passive' investments which avoiding fund managers altogether. Our page on investment costs explains how to reduce fund charges by over 90%, making a huge difference to your returns.
To learn more about keeping your fund and product costs down and improving results, contact us today and you'll get the expert help you need.