# Davy Select



## croker (5 Oct 2012)

What are the opinions on the new Davy Select pension service?
It's advertised all over the place these days as a new way of dealing with your pension.
I have to say it seems very interesting on the face of it, being able to select a huge number of funds and trade shares. And being able to view the pension status 24hours a day seems to be something new to Irish pension schemes( well the ones I've been in anyway).


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## Marc (5 Oct 2012)

A recent 401k survey in the USA of tens of thousands of investors showed that as the number of funds increased the participation rates in the scheme declined.

From this we can conclude that on average wide fund choice does not necessarily equate to positive investment results for investors.

There are four pillars to investing: fees, risk , return and tax. 

Davy Select does a great job of dealing with fees and taxes for investors but investors will still be well served by the services of a Professional adviser who can help them to determine the best asset allocation to meet their need, willingness and capacity to take investment risk.


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## kateball (11 Oct 2012)

Marc I dont know what you mean by the Davy Select doing a great job with the fees. I thought so as well when i looked up their website it says "NO dealing charges on managed funds "- so i thought that meant they were free? When i rang them today to enquire about investing in some fidelity fund they told me the charge would be 0.75% and an extra charge on the fidelity funds. I asked what did that mean they said about 1.75% in total. So i asked why does your website say no dealing charges - she couldnt explain. She said there were no dealing charges!!

Frustrated i hung up and looked closer at the website - this is what it says in small print.....

Investment funds charge a range of fees within the fund, including but not limited to investment management fees, trustee fees, administration fees, and legal fees. These fees are accrued in the calculation of the NAV. You should read the relevant Fund Prospectus for fee information on any fund that you may be interested in.

So when they say no dealing charges do they mean they will screw you for everything else?

 I think i will stick to dealing with my uk stockbroker - not cheap but at least they are honest!!
Kate


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## croker (12 Oct 2012)

Well the thing is all pension funds in Ireland are going to screw us for hidden fees no matter what.
The only thing I was interested in this Davy Select thing was being able to build my pension pot by trading myself, even if paying commissions, without depending on incompetent fund managers.


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## Marc (12 Oct 2012)

Hi Kateball,

I spoke with Ciaran O'Donoghue, Managing Director of Davy Select today and he confirmed that there are no charges applied to dealing in managed funds.

They do of course apply a dealing charge to exchange traded investments such as stocks, shares and Exchange Traded Funds.

As you point out the website does include the following in respect of investments in funds:

"Investment funds charge a range of fees within the fund, including but not limited to investment management fees, trustee fees, administration fees, and legal fees. These fees are accrued in the calculation of the NAV. You should read the relevant Fund Prospectus for fee information on any fund that you may be interested in."

To be fair to Davy here they are only disclosing the fact that investment funds include these costs and they are deducted in addition to the Davy administration charge.

The mistake many people seem to make is to assume that these funds are therefore more expensive than those offered by say an Irish Insurance Company.

This isn't necessarily the case. Irish funds are not required to disclose these fees (known internationally as the total expense ratio or TER) but you can be sure that you are paying more than the annual fund management charge that is quoted. You just don't know how much more and they are not required to tell you. Under these conditions who are you more willing to trust?

Recently Morgan Stanley estimated that the average TER across Europe was 1.91%pa for an average actively managed equity fund.

According to research by Lipper Fitzrovia in the UK in January 2007 the average fee for multi-manager funds investing into equity funds is 2.2%pa and can be as high as 3%pa. Breaking this down further, the average inclusive TER for a fund of funds investing principally into externally managed equity funds was found to be 2.44%pa.

If you buy a fund through Davy select that is regulated by the european wide regulation*Undertakings for Collective Investment in Transferable Securities UCITS) then you should receive a Key Investor Information Document which amongst other things will tell you the total expense ratio, risk rating of the fund and other helpful information. You will also be able to obtain a prospectus document and audited reports and accounts. Finally, you will be able to access an independent fund research service such as Morningstar and be able to compare funds.

However, this isn't the end of the story when it comes to fees in Investment funds.

An additional cost of investment which is often overlooked by investors and their advisers is the impact of trading within a portfolio. Perhaps the easiest way to think of this is that every time a fund manager buys an Irish Stock, a Stamp Duty of 1% applies to the purchase. Therefore, the more “active” the fund manager is at trading stocks, the more the fund has to pay in expenses such as stamp duty and brokerage commissions.

I have reviewed several studies into these additional hidden costs associated with portfolio turnover. Trading stocks within any fund (even an index tracker or ETF) creates additional costs such as stamp duty, broker commissions etc. These additional costs are also born directly by the investors in the fund and are not included in the TER.

A study in the UK by the Financial Services Authority estimated that the additional costs for a typical fund turning over 80% of its holdings in a year could add an additional 1.44%pa in costs.

An 80% turnover might seem like a really high number and one might think unrealistic. But think about it this way, how else is an active fund manager going to justify their additional costs unless they are being "active".

Another Lipper Fitzrovia study into UK investment funds in 2007 concluded that the average turnover for a range of popular investment funds averaged 74.57%pa.

In conclusion, Davy Select is offering a way for investors to obtain a wide choice of investment options and they are offering a competitively priced service. I have no connection with Davy and no vested interest here other than an interest in ensuring that Irish investors have access to a wide choice of investment options at reasonable cost. Remember that I had this facility in the UK in the late 1990s. Ireland is only now playing catch up.

But as I stressed in my earlier post - choice isn't a good thing for everyone. Most investors pick funds on the basis of past performance, even though every fund advertisement has to tell you that it is meaningless as a method of fund selection.

Research from Morningstar confirms that the best predictor of future winning potential is cost. I.e the lowest priced fund is probably the "best".  http://www.morningstar.co.uk/uk/news/95449/High-Fees-Destroy-Bond-Fund-Performance.aspx

And finally, many people including most advisers in my experience do not fully understand the real cost of investing, issues like fund turnover are almost never reported and rarely discussed at presentations by fund managers - and I would know I've been going to these things for over 20 years.

Investors are paid for risk and from that they deduct their fees and expenses.
Objectively working out the right asset allocation to meet an investor's need, willingness and ability to take risk is a process that is best achieved by working with an appropriately qualified and preferably fee-based adviser. There are now nearly 200 CERTIFIED FINANCIAL PLANNING professionals in Ireland. That would be a good place to start.


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## kateball (15 Oct 2012)

Hi Marc
A very confusing response to a simple issue - Davy Select is being promoted as a cheap way to access funds - its far from cheap! Of course there are no Davy dealing charges - they make their money on the annual charges but the true cost is way more than 0.75%.

The cost is well over 2%pa for most funds available - or 3 times more than they are advertising - I thought there would be uproar about this from their competitors!!? How can you still see that Davy are doing a great job dealing with fees?

Kate


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## Marc (15 Oct 2012)

Kate

I'm sorry that my post didn't help you to understand the way that fund platforms work.

The best I can say is that you seem to be mixing up their admin fees with the fund manager fees. When in reality, these are separate costs and the total fee you would end up paying really depends on how you actually  choose to invest your money. Ie the funds you choose to buy.

For example, I would typically be paying around 1%pa including pension trustee and fund management fees because I would be using ETFs. In my view this is the smart way to invest as all my posts on AAM will support. Equally this is a competitive total cost compared to alternative pension products in the market.

However, if you choose to invest in more expensive funds, you might end up paying more like 1.75%pa.

I think this point is clearly made on the Davy website but you seem to disagree and of course you are free to do so.


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## kateball (28 Oct 2012)

*davy select charges*

Good piece in Sunday Times today about Davy Select and the charges. They point out that annual fees on funds can be as high as 1.85% pa - yet Davys continue to advertise 0.75% for funds.  

Many customers are going blind into this so its good to see the Sunday Times clearly stating the charges - hopefully some good advisors out there might take Davys to task on this and force them to be a bit more honest? 

Kate


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## MyAdviser (30 Oct 2012)

Kateball, Marc's post is correct and it highlights the complexity of what should be simple. That said it is what it is for now and if you want to get tax relief on pension payments then trying to cut the cost requires something to compare against. A nil commission standard prsa costs 1% to run and there are no exit or entry charges. This ignores Marc's points about underlying charges in the fund but for simplicity let’s ignore that. 

Davy Select costs 0.75% for admin and management of the PRSA plus annual fund management charges of 0.15%-1.45%. The total charge p.a. is therefore 0.9% to 2.2%. These charges include a rebate from the fund managers which has the effect of lowering the running cost of many of the funds. The 0.15% funds are index trackers and there is no rebate with them. Other funds like Standard Life's GARS cost 1.6% on the Davy Select Fund List but it actually costs the client 0.8% p.a. 

There are no other charges and built into the 0.75% is 0.5% which would be paid to your independent adviser (assuming you set it up via them). This payment could off set advice fees and fees for other services. If you set it up directly with Davy Select Self-Invest option then Davy keep the 0.5% and you get no advice. 

So in conclusion you can get a nil commission PRSA (which has no advice built in) for 1% p.a. or Davy Select PRSA for 0.9% p.a. via an adviser with a built in 0.5% p.a. to help fund advice assuming you are happy with just index tracking funds. 

Hope this helps. Regards Michael


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