Author Topic: Big hidden fund charges revealed by new rules - Are you paying what you thought?  (Read 1032 times)

Helium

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I read this article in the FT today about how new EU regulations (MiFID II) have forced asset managers (including MMM favourite Vanguard) to disclose hidden charges they hadn't previously been telling their customers about.

Fund managers are no longer allowed to provide just an ongoing costs figure (OCF), which is the industry’s standard measure of running costs. Instead, they have to give the total cost, including transaction or trading costs and other charges.

Once you include transaction costs, many investors pay almost double  the OCF in the UK's most popular funds.

To take a Vanguard fund  as an example, for Vanguard LS 40% Equity, the OCF is 0.22% but the transaction costs are 0.12%, bringing the total cost of ownership to 0.34%.

Were any of you aware this was the case? I wasn't.

Seems pretty dodgy to me.  Is this a cause to revisit your choice of investments?

PhilB

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This has been fairly well trailed.  It comes down to the more actively you trade, the more you pay - yet another reason to prefer passive investing as those 'hidden' transaction costs on some of the more active funds can be a real drain.  At the other extreme, something like an S&P 500 tracker would have minimal transaction costs as the strategy doesn't change and there's no rebalancing.  Something like your VLS 40 will have higher transaction costs than a 100% equity tracker, depending on how frequently they rebalance.
Bottom line is it's something to be aware of, and good news it's being made more visible, but not something to panic over.

sea_saw

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There's a lot to check when picking funds!

As has been said before, 'tracking error' is just as significant a factor as fees. Generally trackers lag behind the index they're tracking, so a fund that hugs the index better will potentially do a better-enough job to compensate for slightly higher fees.

http://monevator.com/how-to-use-tracking-error-to-uncover-the-true-cost-of-an-index-tracker/
http://monevator.com/tracking-error-how-to-measure-it/

I think though it's important not to get overly worried about picking the perfect funds. It's something that you could dive as deeply into as you wanted – I'm sure there's weeks of research and expert comparison arguments in there for those so inclined. But if that would drive you round the bend, don't feel that you have to. Just having the principles of: high savings rate, investing said savings in long-term, low-fee, passive funds is already a winning strategy. You can save tinkering and perfecting for when you're in the mood.