# Execution-Only Approved Retirement Fund (ARF) Charges Query



## Investor (2 Nov 2019)

I apologize for starting yet another thread on ARFs, but here goes...  I am helping a family member to move their pension to a self-directed ARF.  They have about €120,000, and the provisional plan is to open an execution-only account with Davy.  Davy do not impose any set up or transfer charges.  Their annual dealing charge is 0.90% per annum—additional overseas charges are spelled out below.

The idea is to keep things as simple as possible by investing in two accumulating Vanguard ETFs that trade on the Deutsche Börse: one global stock fund, the Vanguard FTSE All-World UCITS ETF (VWCE), with an OFC of 0.22%, and one euro hedged global bond fund, the Vanguard Global Aggregate Bond UCITS ETF (VAGF), with an OFC of 0.10%.

Suppose for the sake of argument that the initial allocation is 50/50.  Assume that two transactions (one stock ETF sale and one bond ETF sale) are made annually to rebalance the account and meet Revenue’s 5% minimum distribution requirement for people over seventy.  Then, by my calculations, excluding bid ask spreads, and security transaction costs internal to the ETFs, the total cost of ownership of this ARF in year one would come very close to:


Annual dealing charge€120,000 x 0.90% = €1,080Stock ETF OFC€60,000 x 0.22% = €132Bond ETF OFC€60,000 x 0.10% = €60Stock ETF sale overseas charges€3,000 x 0.06% minimum fee = €1.80 + €25.00 foreign transaction settlement charge = €26.80Bond ETF sale overseas charges€3,000 x 0.06% minimum fee = €1.80 + €25.00 foreign transaction settlement charge = €26.80Total cost€1,080 + €132 + €60 + €26.80 + €26.80 = €1,325.60, or 1.1% of assets under management

I understand that QFMs such as Conexim and ITC offer ARFs for 0.40% per annum, which is much lower than Davy’s 0.90% charge, but one has to go through an advisor to deal with them, and there are additional expenses too.  I’d consider investing in Dimensional funds with Conexim for example, but the ongoing charges on a comparable balanced Dimensional portfolio with Conexim come to 0.41%, which is 0.25% higher than the equivalent weighted Vanguard OFC of (0.22% + 0.10%) / 2 or 0.16%, so that narrows the gap with Davy:


Annual custody and commission charge€120,000 x 0.40% = €480Dimensional balanced fund OFC€120,000 x 0.31% = €372Portfolio construction and monitoring charge€120,000 x 0.10% = €120One annual transfer from account€50Total cost€480 + €372 + €120 + €50 = €1,022: 0.85% of AUM, or €303.60 less than Davy

My question is this: does anybody know if there are there any advisors out there who would be willing—for a once off implementation charge—to set up an ARF on a pure execution-only basis that would work out less expensive than a Davy ARF, assuming a break-even point of three or four years out?  I don’t think 90 pbs is cheap for a simple pension wrapper, but at least Davy’s fees are transparent, and their platform puts the client in control.  I also like Vanguard ETFs—I trust the company, and admire its late founder, John Bogle.  But I’m always open to suggestions.  Is there a better option of which I’m unaware?


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## Oisin19 (2 Nov 2019)

You should also be able to buy the Vanguard funds with Conexim/ITC which would save you 0.5%. (i.e. the 0.9% vs 0.4%)? You just need to find an advisor to execute without a trail. There maybe someone even here who would execute the transaction for an upfront fee (which could be deducted from the ARF) and no trail.


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## Marc (2 Nov 2019)

We can source QFM and custody 0.30%
Info@globalwealth.ie

Chartered Financial Planners








						Planning for Retirement Planning for retirement - a guide for investors in
					

The purpose of this guide is to provide investors approaching retirement with an understanding of their retirement options and some of the more important issues to consider.  It also sets out generic guidelines for advisers seeking to advise their clients on retirement planning matters.  Clients...




					joom.ag


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## Investor (2 Nov 2019)

Fergal19 said:


> You should also be able to buy the Vanguard funds with Conexim/ITC which would save you 0.5%. (i.e. the 0.9% vs 0.4%)? You just need to find an advisor to execute without a trail. There maybe someone even here who would execute the transaction for an upfront fee (which could be deducted from the ARF) and no trail.



@Fergal19: Thanks for your feedback.  Conexim does levy additional charges on clients who invest in ETFs instead of a fund from their own default suite of offerings.  There’s a 0.20% dealing commission subject to a €40 minimum, and a €30 trade processing fee.  So, again assuming two rebalancing transactions and one distribution per annum on a two fund portfolio, if those Vanguard ETFs were available, the charges would, I think, come to €480 (€120,000 x 0.40% custody charge) + €132 (stock ETF OFC) + €60 (bond ETF OFC) + €140 (2 x dealing commission + processing fee) + €50 (transfer fee on transfer out) = €862—about 72 bps, or €463.60 less than Davy.  So if there was an advisor whose upfront fee was reasonable, that might be an option.


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## Marc (3 Nov 2019)

info@globalwealth.ie

The case for smaller companies in an equity portfolio


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## Sarenco (5 Nov 2019)

Marc said:


> A typical equity portfolio is more than 10,000 stocks. Which ones are you missing?
> 
> for starters lots of small companies. Add those to your portfolio and on average expect to improve returns by around 2%pa. Job done QED.


I wonder is that a reasonable expectation?

Over the last 5 years, the FTSE All-World Index has returned 7.7% per annum, whereas the FTSE Global All Cap has returned 7.6%.

Since 1972, the S&P500 has returned 10.28% per annum, whereas the broader US market has returned 10.33%.

So, at least historically, adding small caps at their market weight doesn't appear to have made any material difference. 


Marc said:


> does adding say REITs to a portfolio improve diversification?


A stock index will obviously already include REITs at their market weight.  Are you suggesting an overweight?


Marc said:


> it is literally possible to prove that you will be worse off with the approach of a simple stock bond mix.


That's impressive.  Is your crystal ball available for hire?


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## Sarenco (5 Nov 2019)

@Marc

I noticed that you have just replaced your previous post with a chart comparing the simulated performance of the S&P500 with the Dimensional US Micro Cap Index over an extended period.

I assume this is to justify your previous claim that adding small caps to a large/mid-cap stock portfolio (presumably at market weight) can be expected to improve returns by around 2%pa, on average.

Micro caps usually only refer to companies whose market capitalisations are in the lowest 5% of total market capitalisation.  They are much more volatile than large cap stocks.

Adding a fund that tracks this index, at market weight, to a large/mid cap index fund would not be expected to make any material difference in terms of the return of the overall portfolio.  The performance of the large cap stocks would still dominate the return of the overall portfolio.

It certainly wouldn't be expected to improve portfolio returns by around 2%pa, on average, as originally suggested.


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## Sarenco (5 Nov 2019)

As a matter of curiosity, I checked the respective returns of the DFA US Micro Cap Fund (DFSCX) and Vanguard's S&P500 tracker (VFINX) from the start of 1985 to date.

VFINX actually outperformed DFSCX (11.07% CAGR v 10.91% CAGR) over that period and did so with considerably less volatility.

And that's before any advisory fee.


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## Sarenco (5 Nov 2019)

@Marc

I see you have now completely changed your post for a third time.  Would it not be better to respond to other posters in sequence so others can follow the discussion?

I will just make a few simple points:-

-  In theory, you would expect small caps to produce a higher return than large caps over time simply because small caps are more risky/volatile than large caps.  Do small caps give investors a higher risk-adjusted return than large caps?  I can't see it.

-  Investing in small caps is more costly than investing in large caps. DFA established their Micro Cap Fund in the early 80's to capture the so-called small cap premium.  Has it succeeded in doing so after costs?  Nope.

-  Your original claim was that adding small caps to a large/mid-cap portfolio (presumably at market weight) could be expected to add 2%, on average, to annual returns.  I would suggest that there are no grounds whatsoever for that expectation.

It seems to me that adding small caps to a large/mid-cap portfolio might reasonably be expected (but certainly not assued) to add a tiny amount of additional return over the very long term, while adding a commensurate amount of additional risk/volatility to the portfolio.


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## Steven Barrett (6 Nov 2019)

Back to the OP, there's loads of options to get cheaper than 0.9%. It doesn't have to be under a self directed option either, all of the life companies have a selection of passive funds and the big three of Blackrock, State Street and Vanguard can all be accessed. If you would like to pick and choose between all three or more, it would be a self directed option. 


Steven
www.bluewaterfp.ie


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## Gordon Gekko (6 Nov 2019)

Some of the stockbrokers do Execution Only ARFs at 0.2%-0.4%. Lob an ETF on at 0.1% and you’re still in the very cheap category.


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## Investor (8 Nov 2019)

It is a pity that VWCE, Vanguard’s UCITS global ETF, tracks the FTSE All World Index, which contains only large and mid cap stocks; VT, their U.S. listed global ETF, tracks the FTSE Global All Cap Index, which contains small caps too.  But as @Sarenco notes, the 5 year annualized returns on both indexes have been almost identical.  (For purposes of comparison, as of 31 Oct 2019, the 5 and 10 year annualized returns in USD on the MSCI All Country World Index (large and mid) were 7.66% and 9.39%, while the corresponding returns on the MSCI All Country World Index IMI (large, mid, and small) were 7.59% and 9.50%.)

One _could _build a market weighted global all cap stock portfolio using three iShares ETFs: approximately 75% iShares Core MSCI World, 12.5% iShares Core MSCI Emerging Market IMI, and 12.5% iShares MSCI World Small Cap, but given the minor difference in expected performance, it’s not clear to me that the game would be worth the candle for a €60,000 stock portfolio in a Davy AFR after accounting for the higher small cap ETF expense ratio, and the extra overseas charges and round trip bid-ask spreads that would be incurred by the need to rebalance periodically.

There is certainly a compelling case based on research by French and Fama among others that tilting a portfolio towards factors such as size, value, momentum, profitability, and quality can potentially improve risk-adjusted returns over long investment horizons.  But if markets are efficient, some of these factors may involve other risks apart from volatility and liquidity etc. that are not well understood, so the outperformance may turn out to be only apparent.

If there prove to be behavioural explanations for particular factor premiums, then assuming that human nature doesn’t change, the mispricing in question is reasonably likely to persist.  Some argue, for example, that investors systematically overvalue growth companies and undervalue value companies, and that a contrarian can profit from this irrationality. But again, if markets are efficient, then anomalies that become widely recognized as such will tend to be arbitraged away in time.

Perhaps the biggest problem with factor-based investing is that factors can go through long periods of underperformance, and though it’s no fun being wrong in company during a market downturn, it’s much worse being “wrong and alone.”  In short, the best plan in the world is no good if you are unable to stick to it, and unless a person is sure that they fully understand the case for overweighting some factor, and is fully committed to maintaining their tilt through thick and thin (and there aren't that many of us, professional or otherwise, who fit that description), then they are in danger of suffering tracking error regret, and of giving up and selling at the worst possible time; a point that even the strongest advocates of factor-based investing, like Larry Swedroe, are happy to concede.

There is nothing wrong with Dimensional Fund Advisors’ index-like funds, and their investment strategy is based on years of robust academic research, but a complex portfolio is not necessarily sophisticated, nor is a simple one necessarily the opposite.  They say that—unlike term life insurance—whole life insurance is sold, not bought, and it has also been observed that as a rule of thumb complicated investment products (that work until they don't) are more likely to benefit brokers and advisors than their clients.

For some people, as per the deleted post by @Marc, a good fee-based advisor who acts as a genuine fiduciary may be worth every penny, and among the most valuable services such an advisor can provide may be that of protecting their clients from themselves.  But of course, there are plenty of bad advisors too, a fact that generates something of a catch-22:  unless you know enough about investing to be able to distinguish a good advisor from a bad one—or are fortunate enough to have a trustworthy friend or family member who can do so for you—then choosing an advisor is a highly risky proposition.  But by the time you’ve educated yourself about personal finance and investing to the point where you can confidently make that choice, it is quite possible that you already know enough to manage your investments on your own...


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## Investor (8 Nov 2019)

Gordon Gekko said:


> Some of the stockbrokers do Execution Only ARFs at 0.2%-0.4%. Lob an ETF on at 0.1% and you’re still in the very cheap category.


That does sound very cheap.  Could you name a specific example?


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## elacsaplau (8 Nov 2019)

Hi Investor,

Thanks for taking the time to write such an excellent piece. I particularly liked the bit about choosing an advisor - the paradox of using an advisor is that once you know enough to choose a good advisor, you also almost know enough to manage your own money.

I introduced "almost" because a good adviser should still be able to add value in many areas to the informed client (and even more value to the semi-clueless one)...…….so long as appropriate fees are applied.

However, in my opinion, fees are a big problem with the advisory model and creates a further paradox because the business model of the advisory firm works best when asset under management (AUM) charges are levied - but such a model is generally not in the clients' best interest.

In addition, how can clients protect themselves from spurious claims? The initial suggestion made on this thread - admirably challenged by Sarenco - was that adding small cap would "increase returns by around 2%. Job done. QED." [Note: the claim was not even that small cap can reliably beat the broader market by 2% in a head to head...…..but that simply adding/tilting to small cap, as part of a broader portfolio, gets you an extra overall return of 2%! One wonders what all-in small cap would deliver relative to the market long-term?!]

Investor - demonstrably, you understand the merits of such a claim in relation to small cap but I strongly suspect that you are in a minority.


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## Investor (8 Nov 2019)

Sarenco said:


> @Marc
> 
> I see you have now completely changed your post for a third time.  Would it not be better to respond to other posters in sequence so others can follow the discussion?



Your point is well-taken @Sarenco.  It certainly would.


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## Investor (8 Nov 2019)

Thank you @elacsaplau.

My argument about the limited usefulness of advice was not exactly original.  Paul Samuelson made much the same point about money managers in his seminal paper “Challenge to Judgment,” which was published in the first edition of _Journal of Portfolio Management_ in 1974, and influenced John Bogle to launch the first retail index fund a year later:

It is not ordained in heaven, or by the second law of thermodynamics, that a small group of intelligent and informed investors cannot systematically achieve higher mean portfolio gains with lower average variabilities.  People differ in their heights, pulchritude, and acidity.  Why not in their P.Q. or performance quotient?  Any Sheik with a billion dollars has every incentive to track down organizations with such high P.Q.  (But, paradoxically, it takes P.Q. to identify P.Q., so it is not that easy to get off the ground.)​
To be fair, I completely agree with you that a conscientious advisor in the right circumstances can add value for both informed and uninformed investors, and against the above reasoning it could well be urged—as William De Britaine put it in the seventeenth century—that “he who will be his own Counsellour, shall be sure to have a Fool for his Client.”

I also agree that both spurious claims and excessive charges are intractable problems faced by ordinary investors.  The first is a classic example of asymmetric information, for which only partial solutions exist.  Used car salespersons can signal their _bona fides_ by offering warranties to their customers, but the uncertainty endemic to securities markets precludes the use of this mechanism in the financial services industry.  Regulation only goes so far, competition is weak in the small Irish market, and reputation is an imperfect guide to type.  Forums like Askaboutmoney.com and  in the US can be very helpful, but they’re not for everyone.

As for fee structures, there is none that prevents all conflicts of interest, though at least the percentage of assets under management model is not as bad as commission-based selling, which was banned in the UK seven years ago, but is still prevalent in Ireland.  Hourly fee and flat fee alternatives exist as well, but again the comparatively small size of both the total Irish market and the average Irish retiree’s pension pot—together with professionals’ need to make a living—ensure that costs remain high by the standards of other larger and more mature arenas.  Faced with this environment, thoughtful people can only remind themselves that while past performance is no guarantee of future results, high costs _are _guaranteed to reduce returns proportionally.  Unlike most things in life, as John Bogle once put it, “In investing, you get what you _don’t_ pay for.”


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## KOW (8 Nov 2019)

Surely after all this discussion here and in numerous other forums there is a market or demand for a simple product for simple folk like myself.


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## elacsaplau (8 Nov 2019)

Investor said:


> My argument about the uselessness of advice was not exactly original.....



Well - you'd hardly be the first AAMer to get a little help in finessing a post! Indeed, if ever you see anything, even half-decent, from me, it's likely to be environmentally sound...……..[read: recycled!]. 

Anyway, I'm going to see your Samuelson and raise you a Buffett!! From his annual letter of two years ago:

“If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value. In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”[1]

Upon Jack's passing earlier this year, Buffett was more succinct: - "Jack did more for the individual investor than anyone I've ever known."

Buffett is not always right. But he usually is. In his praise of Jack, he certainly was.






[1] I may have got this wording slightly wrong as I'm going completely from memory!!


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## Gordon Gekko (8 Nov 2019)

I remain unconvinced. ETFs are great in theory but how many investors actually achieve the returns? The problem is that people panic at the first sign of bad news. A good advisor helps the client to stay the course.


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## Sarenco (9 Nov 2019)

Investor said:


> One _could _build a market weighted global all cap stock portfolio using three iShares ETFs: approximately 75% iShares Core MSCI World, 12.5% iShares Core MSCI Emerging Market IMI, and 12.5% iShares MSCI World Small Cap, but given the minor difference in expected performance, it’s not clear to me that the game would be worth the candle for a €60,000 stock portfolio in a Davy AFR after accounting for the higher small cap ETF expense ratio, and the extra overseas charges and round trip bid-ask spreads that would be incurred by the need to rebalance periodically.


Since its inception in 1988, the MSCI ACWI (which includes EM stocks) has only outperformed the MSCI World index (DM only) by an annualised 0.02%, with marginally higher volatility.

Like small cap stocks, I think adding an EM index fund at market weight falls into the "doesn't really matter" bracket.  I certainly wouldn't go out of my way to exclude EM stocks but, equally, I wouldn't incur additional costs/complexity to include EM stocks in a portfolio.

Incidentally, I wouldn't rule out executing your strategy through a life company wrapper.  While their costs are frustratingly opaque, that doesn't necessarily mean that they are more expensive than an execution-only approach.  I would imagine that it would also be more straight forward from an administrative perspective.


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## Investor (9 Nov 2019)

elacsaplau said:


> Upon Jack's passing earlier this year, Buffett was more succinct: - "Jack did more for the individual investor than anyone I've ever known."
> 
> Buffett is not always right. But he usually is. In his praise of Jack, he certainly was.



I couldn't agree with you more (unless I had a slightly better memory )


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## Investor (9 Nov 2019)

Gordon Gekko said:


> I remain unconvinced. ETFs are great in theory but how many investors actually achieve the returns? The problem is that people panic at the first sign of bad news. A good advisor helps the client to stay the course.




You have a point.  In _The Investor’s Manifesto,_ William Bernstein claims that to manage their own money well, a person needs four things: an interest in markets, an understanding of probability and statistics, a knowledge of financial history, and the emotional discipline to stick to their plan when things get crazy, and concludes that “no more than a few percent of the population” has the requisite skill set, especially since the critical fourth condition is independent of the other three.

John Templeton famously observed that “The investor who says, ‘This time is different,’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.”  But that always prompts the question, “What if this time really _is_ different?”  I don't mean to stray off-topic, but I worry about my own ability to keep my nerve in the not too distant future if and when—as I think is eminently possible—unexpectedly severe effects of climate change reveal that capital markets have seriously underpriced this risk, and that there's no going back to business as usual (although arguably in an apocalyptic climate change scenario, the performance of one's portfolio might be among the least of one's worries.)

A good advisor will indeed help their client to stay the course by acting as a kind of circuit breaker against panicky trades, and those who provide this valuable assistance deserve to be paid for their time and trouble like anybody else.  But to say it again, it’s not that easy to tell the sheep from the goats in this affair, and Bernstein also warns his readers that you can't be too careful when buying financial services:

People do not seek employment in investment banks, brokerage houses, and mutual fund companies with the same motivations as those who choose to work in fire departments or elementary schools.  Whether investors know it or not, they are engaged in an ongoing zero-sum, life-and-death struggle with piranhas.​
So, potential behavioural pitfalls excepted, not only is there a paradox whereby a financial advisor can help you only if they can’t (because in knowing enough to distinguish competent and conscientious ones from the other kind, you know enough to manage your own money), there’s a dilemmatic “can’t live with them, can’t live without them” aspect to this most problematic of principal-agent problems as well.

Things were easier for the little guy back in the days of the forty year final salary defined benefit pension plan, but those days are gone, and people now are expected to provide for their own retirements by themselves, a state of affairs that, again according to Bernstein, “makes about as much sense as expecting the average person to be his or her own airline pilot or family surgeon.”  It will be interesting to see—in light of all of this—how the operation of the government’s forthcoming Automatic Enrolment Retirement Savings System plays out…


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## Investor (9 Nov 2019)

Sarenco said:


> Incidentally, I wouldn't rule out executing your strategy through a life company wrapper.  While their costs are frustratingly opaque, that doesn't necessarily mean that they are more expensive than an execution-only approach.  I would imagine that it would also be more straight forward from an administrative perspective.




You may be right.  Both Standard Life's Vanguard funds and Zurich's Dimensional funds are potential options.  But Standard levies an AMC of 90 bps on their Vanguard funds (a commission of about 70 bps for themselves), so it's hard to see how that would work out cheaper unless an advisor waived their fees.  Zurich's Dimensional funds for about 40 bps might be more attractive, depending on the additional cost of accessing them.


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## Sarenco (9 Nov 2019)

@Investor

Friends First (now Aviva) also offer a range of State Street index funds.

I don't know what their current offering looks like but they used to offer contracts with an effective (net of broker commission) 100% allocation rate on ARFs, an AMC of 40bps and an annual policy fee of €120.

I don't think that represents particularly good value but I have yet to see a better offering in the Irish market.


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## Investor (11 Nov 2019)

Thanks @Sarenco.  They seem to be charging 65 bps on the State Street funds now.  Maybe Aviva increased the price when they took them over last year.  But I'll look into it.


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## Sarenco (11 Nov 2019)

Investor said:


> They seem to be charging 65 bps on the State Street funds now.


I'm pretty sure they offered a 25bps reduction to the AMC for the policy fee but one of the brokers on here might be good enough to confirm.


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## LDFerguson (11 Nov 2019)

Sarenco said:


> I'm pretty sure they offered a 25bps reduction to the AMC for the policy fee but one of the brokers on here might be good enough to confirm.



At present, Aviva are still offering all the old Friends First contracts as well as the old Aviva contracts unchanged.  I'd imagine that there will be some consolidation of products offered in due course as the amalgamation beds in.  But at the moment it's business as usual.  So the old Friends First contract offering 0.4% annual charge for index-tracking funds with €120 per year policy fee (indexed annually) is still available.  They also have a different structure with a 0.65% annual charge.

Regards, 
Liam
www.ferga.com


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