# Request for Feedback on PRSA Investment Plan



## Investor (19 Jul 2019)

I recently helped a friend to set up a non-standard execution only PRSA with Davy Select, and was hoping to get some feedback on our implementation of the portfolio.  (I’m not a fan of the Life Assurance companies, since so many of their funds are actively managed, opaque, and have all kinds of hidden costs.)

Here is the plan in outline:

*STRATEGY*

1. Euro cost average by making monthly contributions.

2. Commit to maintaining a diversified stock/bond asset allocation in low cost broad index based ETFs rebalanced annually.

3. Begin with an 80/20 stock/bond allocation, and reduce the stock allocation by 1% per year after reaching the age of forty-five when rebalancing the portfolio until the allocation is 60/40 at sixty-five.

*IMPLEMENTATION*

a. Stock ETF: Buy or sell Vanguard FTSE All-World UCITS ETF [ticker VWRL] denominated in euros on the Amsterdam Euronext Exchange once a year when rebalancing the portfolio. (Don’t buy it in sterling on the London Stock Exchange.) Since Davy charges a 0.10% fee and a €25 foreign transaction settlement charge per trade for each instrument listed outside the UK and Ireland, it is cost-prohibitive to buy VWRL monthly. So, as a workaround, buy iShares MSCI World SRI UCITS ETF [ticker SUSW]—a euro denominated global environmental, social and governance fund available on the LSE which tracks the MSCI WORLD SRI Select Index (which correlates quite closely with the MSCI World Index)—on the London Stock Exchange monthly instead, for which Davy levies no trading charges, and sell the entire position to buy VWRL stock ETF and/or AGGH bond ETF when rebalancing the portfolio annually.

b. Bond ETF: Buy euro-hedged iShares Global Aggregate Bond UCITS ETF [Ticker AGGH] on the LSE.

c. _Perhaps_ consider diversifying further in the future when the portfolio has grown by assigning 10% of the stock allocation to a small-cap value ETF (for higher expected returns at the cost of extra volatility), 10% to a REIT (for inflation protection and added diversification), and possibly 5% to an Irish ETF (a little home bias may be behaviorally justified). There are not many euro-denominated choices available on the LSE, so the options to build a more complex portfolio are limited, and the ETFs listed below are small and thinly traded with large bid-ask spreads. Thus they’re not ideal, but there’s nothing else.
Small-cap value ETF: WisdomTree Europe SmallCap Dividend UCITS ETF EUR Acc [Ticker DFEA] (Note that this ETF tracks a fundamentally weighted index.)
REIT: SPDR® FTSE EPRA Europe ex UK Real Estate UCITS ETF (EUR) [Ticker EURE]
Ireland: WisdomTree ISEQ 20® UCITS ETF [Ticker ISQE]

d. Be prepared for a worst-case scenario loss of up to approximately 35%, but expect an annualized inflation-adjusted (i.e. real) return over time of approximately 4%.

*NOTES*

Assume a 70/30 stock/bond allocation. Then, ignoring ETF transaction costs such as bid ask spreads, market impact costs, and net asset value premiums and discounts, the approximate cost of ownership as a percentage of assets under management works out as follows:

(0.75% Davy annual dealing charge) + (0.25% VWRL ongoing charges figure x 0.70) + (0.10 AGGH total expense ratio x 0.30) = 0.955%.

The actual cost is a little higher because of the iShares SUSW ETF expense ratio of 0.30% and the once a year 0.06% + €25 Davy overseas charge to buy the Vanguard VWRL ETF, but the effect of these additional costs will diminish over time as the size of the portfolio and the bond allocation percentage increases.  In short, over the lifetime of the PRSA, the cost of ownership should come very close to 1%, which is very high by international standards, but not bad for Ireland.

Any criticism of the above plan would be greatly appreciated...


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## EmmDee (22 Jul 2019)

Not a criticism - more a potential alternative.

Have you considered using a platform such as Etfmatic. You can set the equity / bond balance and they auto invest into a model portfolio but you can adjust the components if you want to increase or reduce exposure to particular markets.

They charge 0.48% for accounts holding less than €25k and 0.29% for accounts greater than $25k. The underlying TER for the ETF's vary but my average TER is 0.12% at the moment giving total expense cost of 0.39%. There are no transaction fees. They also automatically reinvest and rebalance.

I don't know if you can access REIT's / property funds. They only transact ETF's.


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## elacsaplau (23 Jul 2019)

Investor said:


> (0.75% Davy annual dealing charge) + (0.25% VWRL ongoing charges figure x 0.70) + (0.10 AGGH total expense ratio x 0.30) = 0.955%.



Hi Investor,

Can you elaborate on these charges please?




EmmDee said:


> Have you considered using a platform such as Etfmatic.



Do these funds accommodate Irish pension funds and if so, how?


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## Gordon Gekko (23 Jul 2019)

Bonds have no place whatsoever in a sub 45 year old’s pension fund.


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## EmmDee (23 Jul 2019)

elacsaplau said:


> Do these funds accommodate Irish pension funds and if so, how?



If the account is opened in the name of the pension structure would it not work?

They also seem to have a B2B offering for financial advisors for larger scale activity


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## Marc (23 Jul 2019)

We’ve been operating like this in Ireland for over a decade.

It’s perfectly possible for a pension trust to hold a dealing account. There needs to be some high level agreements between the trustees and the execution venue but once in place these are relatively simples.

I’ve been paying 0.25% for the pension trust and 0.09% for custody for the last few years.


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## Sarenco (23 Jul 2019)

Gordon Gekko said:


> Bonds have no place whatsoever in a sub 45 year old’s pension fund.


I'm not sure I agree with this in every case.

@Marc told us on another thread that he has clients in their mid-40's that are already grappling with the €2m SFT.  I don't think it would necessarily make sense for somebody in that position to maintain a 100% allocation to equities.

Also, I'm not sure it would always make sense for somebody in their mid-40's that is planning to retire their fund at 50 to maintain a 100% allocation to equities.


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## Investor (24 Jul 2019)

@EmmDee and @Marc: Thanks for your replies.  Although the Davy annual dealing charge of 0.75% is high by international standards for an execution only PRSA, my understanding (which could well be mistaken) is that while it would possible, as Marc points out, for a pension trust to open a dealing account with a low cost broker such as ETFmatic or DeGiro, the set up costs and ongoing management charges associated with a retirement annuity contract or a small self administered pension would be higher for small portfolios.  (0.75% of €250,000 is €1,875, for example, so only if one’s pension pot were over €250K and the RAC or SSAP costs were under €1,875 per annum would it make sense to go this route.)

@Marc: Perhaps you could correct me if I’m wrong.  You say you’ve been paying “0.25% for the pension trust and 0.09% for custody,” but what about initial set up costs and ongoing intermediary fees for a small individual investor?  Is there a less expensive way for somebody who only wants to purchase ETFs DIY-style to open a personal pension account in Ireland than via a Davy PRSA?  While I realize that there are administrative and compliance costs associated with PRSAs, and that other, larger jurisdictions benefit from economies of scale, from an execution only perspective the PRSA wrapper adds very little value, and the 0.75% annual dealing charge is frustratingly high when compared to the cost of an SIPP (Self Invested Personal Pension) in the UK or an IRA (Individual Retirement Arrangement) in the US, or to buying ETFs via a broker like DeGiro outside of a pension wrapper for that matter.  Hopefully the advent of the PEPP (Pan-European Pension Product) will increase options and reduce costs for Irish pension investors...


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## Investor (24 Jul 2019)

@elacsaplau: Davy Select charges holders of execution only PRSAs 0.75% per annum to administer the account.  The Vanguard FTSE All-World [stock] ETF has an expense ratio of 0.25% and the iShares Global Aggregate Bond ETF has an expense ratio of 0.10%.  So if the asset allocation were 70/30 stock/bond, then the approximate weighted total annual fee would be about 0.75 + (0.25 x 0.70) + (0.10 x 0.30) = 0.955%.  I hope this makes sense.


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## Investor (24 Jul 2019)

@Gordon Gekko and @Sarenco: I agree that it could well be appropriate for an aggressive young investor with a relatively small portfolio and a long time horizon to have a 100% equity allocation, and historically low bond yields make fixed income assets particularly unattractive right now.  That said, willingness, ability, and need to take risk vary widely even among individuals of the same age group depending on factors like emotional and intellectual makeup, stability of earned income, and accumulated assets.  The S&P 500 index lost 56.78% of its value between 9 Oct 2007 and 9 Mar 2009, and many investors who were overweight stocks panicked and sold during that time.  On top of that, there’s no guarantee that some future global drawdown won’t be more severe yet.  Opinions differ, but I tend to trust Vanguard, and even their target date (lifecycle) retirement fund aimed at US eighteen to twenty-one year olds holds 10% in bonds.


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## Marc (24 Jul 2019)

Competition in Ireland has made pension contracts more competitive in recent years.

Although a minimum fee applies to most contracts it’s now only €300pa (used to be €1000 plus vat) so competitive above €80,000pa

No minimum fee applies to PRSAs.
The wholesale cost of a PRSA is 0.5% so even if an annual advice fee of 0.25%pa is added it’s no more expensive than DIY and you’ll save on dealing and FX charges by avoiding ETFs


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## Investor (24 Jul 2019)

@Marc: Thanks so much for your helpful response!  (And sorry for posting such a lengthy follow-up!) Perhaps I’m missing something, but unless there are additional hidden costs, it seems to me that if an individual Irish client could set up and continue to contribute to an RAC or a SSAP for only €300 per annum, then since €300 is 0.75% of €40,000, anybody with over €40,000 worth of ETFs in an execution only PRSA paying an annual management fee of 0.75% could save money by switching to an RAC or SSAP.  Am I correct in so thinking, or is there more to it than that?

I take your point that a PRSA purchased via an adviser that charged a 0.5% annual fund management fee plus a 0.25% annual advisory fee would be no more expensive than a DIY PRSA as far as the annual dealing charge goes, but I do not want to avoid ETFs.  My question is whether there is any way for a small individual investor in Ireland to make pension investments in ETFs less expensively than via Davy Select’s execution only service.  I am uncomfortable with the funds offered by Irish life assurance companies for multiple reasons:

*1. Opacity*

Compared to ETFs, the life assurance funds are extremely opaque.  Most seem to be actively managed, many are overly complex, and it is hard to dig up information on the fund managers.  The passively managed funds often do not seem to specify which indexes or benchmarks they are tracking, and in any case appear to exhibit high tracking error relative to their mysterious benchmarks.  There is no easy way to obtain complete information about the funds’ holdings, their historical volatility, or their turnover rates.  Sharpe ratios are not provided, so it is impossible to assess portfolio efficiency.  In short, life assurance funds make it very hard for the potential buyer to “look under the hood.”

*2.  Active management*

All of the academic evidence points to the fact that over long time periods the vast majority of actively managed funds underperform broad index based funds, but most life assurance funds seem to be actively managed.  In addition, many are not adequately diversified, and so may be subject to sector risk and style drift.  And finally, given that as a small nation, we Irish seem to be particularly prone to the bandwagon effect, recently hot actively managed funds may suffer from asset bloat as a result of large inflows.

*3.  High costs*

Active funds incur all kinds of internal transaction costs in addition to the management and advisory fees: brokerage commissions, bid ask spreads, and market impact costs associated with the buying and selling of securities.  Perhaps the passive funds are less costly as a result of lower turnover rates, but there is no way to tell what kinds of hidden costs they might involve such as soft commissions (payment in kind arrangements to third parties) and cash drag (as a result of a permanent cash position needed to facilitate share purchases and unit redemptions).  Once again, the lack of transparency puts me off these products.


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## elacsaplau (24 Jul 2019)

Thanks Investor for clarifying the investment charges. I admire your clear thought processes, analysis and writing style.

Best of luck in trying to get clear details of options regarding lower charges in Ireland!!



Investor said:


> Perhaps I’m missing something, but unless there are additional hidden costs, it seems to me that if an individual Irish client could set up and continue to contribute to an RAC or a SSAP for only €300 per annum....



This would seem like a reasonable reading of what Marc wrote but...……...I think that when you press, you will find that such charges simply ain't available in isolation. [I've tried to do what you are trying to do many times in these here parts - always to no avail!!] I shall watch with interest!!


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## Investor (24 Jul 2019)

@elacsaplau: Thanks for the thumbs-up!  It’s very kind of you, and it’s good to know I’m not alone.  I realize that it’s by no means free for PRSA providers to offer the products that they do; there are numerous regulatory, operational, execution, and custodial expenses that providers incur, but the charges that the Irish financial services industry levies still strike me as disproportionate.  (I hope I’m wrong, but I suspect that, like yours, my attempt to get clarity on costs may be to no avail too.)

Suppose, to take an artificially simplified example, that somebody on the median Irish salary of about €37,775 was to put (a high but recommended) 15% of their income into a PRSA over 40 years at an average annual real return after expenses of 4% (which may be a bit optimistic in light of current high security valuations).  After 40 years of contributions, they’d have amassed €558,110, and on top of the expense ratios of the funds they were holding, they’d then be paying Davy a whopping €4,186 a year not to manage their portfolio in any hands-on way, but simply to hold their assets and to facilitate a few online trades.

And if and when they converted their PRSA to an ARF (Approved Retirement Fund), the annual dealing charge would rise to 0.90%, so they’d have to pay Davy €5,023 a year.  Assuming a safe withdrawal rate in retirement of 4% (or €22,334 in year one), the stockbroker’s annual income from the portfolio of 0.9% of assets under management would come to 22.5% of the investor’s, which doesn’t seem like such a great deal to me—at least not from the perspective of one party to the agreement!  Surely somebody in the industry should be able to make Irish consumers a better offer than this, and still make a profit for themselves.

To say it again, hopefully the impending arrival of the PEPP (Pan-European Pension Product)—or maybe even the government’s proposed new Automatic Enrollment Retirement Savings System—will improve the landscape for the ordinary Irish retail pension investor.  In the meantime, we’ll have to keep pushing for more competition and more openness and just wait and see what happens...


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## Marc (24 Jul 2019)

Investor said:


> @Marc: Thanks so much for your helpful response!  (And sorry for posting such a lengthy follow-up!) Perhaps I’m missing something, but unless there are additional hidden costs, it seems to me that if an individual Irish client could set up and continue to contribute to an RAC or a SSAP for only €300 per annum, then since €300 is 0.75% of €40,000, anybody with over €40,000 worth of ETFs in an execution only PRSA paying an annual management fee of 0.75% could save money by switching to an RAC or SSAP.  Am I correct in so thinking, or is there more to it than that?
> 
> I take your point that a PRSA purchased via an adviser that charged a 0.5% annual fund management fee plus a 0.25% annual advisory fee would be no more expensive than a DIY PRSA as far as the annual dealing charge goes, but I do not want to avoid ETFs.  My question is whether there is any way for a small individual investor in Ireland to make pension investments in ETFs less expensively than via Davy Select’s execution only service.  I am uncomfortable with the funds offered by Irish life assurance companies for multiple reasons:
> 
> ...



You should want to avoid ETFs and I’m not suggesting that the alternative to Davy select is a life wrapped product.

You can invest in UCITS with the same degree of transparency as an ETF.

The clue is in the name - Exchange traded

You have to pay brokerage commission, bid offer spreads and potentially FX charges and foreign exchange fees.

Don’t confuse ETF = passive and therefore good and fund = active and therefore bad

You could invest in passive funds and avoid the dealing charges in ETFs was my point.

As a jumping off point we pay 0.15% for global developed equities 0.22% for Emerging market equities - what is the OCF of the equivalent retail ETF?


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## EmmDee (25 Jul 2019)

A lot of ETF's are UCITS. I have a portfolio of ETF's and they are all UCITS. The TER varies but as an example.... the "equity ex UK" has a TER of 0.12%. The UK ETF has a TER of 0.07%. Emerging markets is the highest at 0.25%.

Even though "exchange traded", they are not the same as closed ended funds. There isn't a bid / offer like a standard equity with additional broker charges. The dealing price is determined by the Net Asset Value calculation.

As mentioned above I pay a custody / account fee of 0.29% pa and no dealing charges.


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## Investor (25 Jul 2019)

@Marc: Thanks for your response.

I’m not sure, notwithstanding the associated costs, that I _should_ want to avoid ETFs.  Despite my espousing a buy and hold approach, I find the liquidity that many ETFs provide reassuring.  Bid ask spreads on large and heavily traded ETFs typically amount to a mere 5 to 10 bps (basis points), and since they are only incurred when one places a trade, they have a negligible effect on buy and hold investors.  Brokerage commissions and overseas charges can be a problem, but only because Irish brokers in general are such bad value.  DeGiro (although their platform design encourages frequent trading, presumably in the attempt to “make it up on volume”) charges only €2.00 + 0.038% for ETF trades anywhere in the world.  Finally, as for foreign exchange fees, there is such a good selection of ETFs with euro share classes that I see no reason to pay them unless one is trying to avoid overseas charges by trading in sterling on the London Stock Exchange, and again, even then, DeGiro charges only a very reasonable 10 bps.  (One other potential issue with ETFs that you don’t mention is that listed prices may diverge from net asset values, but with large and highly liquid funds, this is rarely a problem.)

The 0.15% for a global developed equities fund that you mention certainly sounds good, but there are funds and funds.  Vanguard’s FTSE All-World UCITS ETF (VWRL) has an OCF of 0.25%, but it holds 3,265 large and mid cap stocks in developed and emerging markets and has a turnover rate of only 1%.  (Unfortunately small caps are not included in the index it tracks.)  Most impressively, since its inception in 2012, VWRL has returned 10.23% compared to a return of 10.22% on the FTSE All-World Index, so it has actually _beaten_ the benchmark it tracks (albeit only by 1 bp), and thus effectively has an OCF of minus 0.01%!  Vanguard makes up for its OCF by utilizing the transactional skill of its index fund managers to exploit economies of scale in trading, and by passing on the returns from securities lending to its fund holders.

You say one can invest in UCITS funds with the same degree of transparency as ETFs.  If so, perhaps you could provide me with details of the equities funds to which you are referring, and direct me to where I can obtain KIDs, fact sheets, and prospectuses...

Please allow me to try again for a specific confirmation with another worked example.  (@elacsaplau: Perhaps this may be of interest to you.)  It would take a person on the median full time Irish salary of about €37,775 investing 15% of their income at a real net return of 4% per annum nearly 8 years to accrue a balance of €50,000 and nearly 14 years to accrue €100,000.  Assume a 75/25 stock/bond asset allocation.  Then, to a very close approximation, the cost of a Davy execution only PRSA invested according to my plan in the original post above is given by the following formula:

(0.75% dealing charge) + (0.25% stock ETF OFC x 0.75) + (0.10 bond ETF OFC x 0.25) + €30 overseas charge​
*Case 1.*  At €50,000 this works out to €375 dealing charge + €93.75 stock fund OFC + €12.50 bond fund OFC + €30 overseas charge = *€511.25 or 1.02% of AUM* (assets under management).  If one factors in Vanguard’s benchmark beating performance by subtracting the stock fund OFC, then it’s *€417.50 or 0.83% of AUM*.​
*Case 2.*  At €100,000 it’s €750 + €187.50 + €25 + €30 = *€992.50 or 0.99% of AUM*, and *€805 or 0.81% of AUM* subtracting the stock fund OCF.​
_My question once more is whether any Irish pension provider can offer the small retail investor a better shake than this._


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## Investor (25 Jul 2019)

@EmmDee:  ETFmatic sounds like the best roboadvisor platform for taxable investment accounts; for DIY investors with a portfolio of over €20,000 making 24 trades a year (one global stock and one global bond ETF a month), DeGiro is a little cheaper at €2.00 + 0.038% per ETF trade and with no annual AUM fee.  The larger one’s portfolio becomes, the cheaper DeGiro gets relative to ETFmatic, as the absolute amount of the 0.29% fee increases, whereas the DeGiro fee per trade stays the same given level contributions.  (Annual rebalancing might drive up DeGiro’s cost just a little.)  That said, I agree with you that 0.29% is good value for a good roboadvisor, and it may well be worth it to some investors.  The problem is that—to my knowledge anyway—there is nothing comparable that is easily available for Irish investors in a tax-sheltered pension wrapper, and the tax treatment of ETFs in Ireland is punitive.


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## EmmDee (25 Jul 2019)

Investor said:


> @EmmDee:  ETFmatic sounds like the best roboadvisor platform for taxable investment accounts; for DIY investors with a portfolio of over €20,000 making 24 trades a year (one global stock and one global bond ETF a month), DeGiro is a little cheaper at €2.00 + 0.038% per ETF trade and with no annual AUM fee.  The larger one’s portfolio becomes, the cheaper DeGiro gets relative to ETFmatic, as the absolute amount of the 0.29% fee increases, whereas the DeGiro fee per trade stays the same given level contributions.  (Annual rebalancing might drive up DeGiro’s cost just a little.)  That said, I agree with you that 0.29% is good value for a good roboadvisor, and it may well be worth it to some investors.  The problem is that—to my knowledge anyway—there is nothing comparable that is easily available for Irish investors in a tax-sheltered pension wrapper, and the tax treatment of ETFs in Ireland is punitive.



ETFmatic don't withhold tax. I need to declare income and gains in my annual form and pay the liability. On the plus side, if the account is opened by a tax exempt entity, it would receive the gross income and gains so should work.

Your analysis on volumes of trades and costs might be more relevant for you - my portfolio is rebalanced constantly so in my case I'd rather have zero transaction costs. It all depends on what suits you best


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## Marc (25 Jul 2019)

I find this subject fascinating because I am caught between several mutually exclusive goals.

For example let’s start with Regulation.
The costs associated the Anti money laundering and Know your client have gone through the roof recently and all these costs are being pushed onto consumers.

Simultaneously consumers are looking to digital channels to provide more cost effective solutions and to be clear I’m on your side with this one having campaigned for the last decade for greater transparency and lower costs in Ireland.

Yet I frequently take a negative barrage of abuse from some posters on here seemingly for not providing my services for free.

I’m fairly sure I’m entitled to make a reasonable profit.

So, yes, I could improve on the cost of a pension in Ireland but on a €40,000 account I’d be making  about €100pa.

By my very rough calculations it would be several years before I saw any profit given the high costs associated with on-boarding a new client - yes, even one who “knows exactly what they want”

So naturally there has to be a fee paid upfront to reflect the time to meet these regulatory requirements but also to reflect the added value.

To turn the question around. If I can significantly reduce the ongoing charges why should all that benefit accrue to the investor?

So what would be a reasonable up front cost to pay to set up a pension with lower ongoing charges?


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## Sarenco (25 Jul 2019)

Investor said:


> _My question once more is whether any Irish pension provider can offer the small retail investor a better shake than this._


I looked into this a few years ago and found the whole process incredibly frustrating.

Ultimately, I decided to move my pension to Friends First (now Aviva).  The disclosed AMC is 45bps and I  pay an annual policy fee of €150.  I got a "bonus" allocation of units (102%) and paid the broker a 2% commission (so I effectively got a 100% allocation).

The asset are all invested in State Street index funds of my choosing (I have zero interest in paying somebody to tell me how to invest my money).

So far the units seem to track the relevant indices with a tracking error (spread) of around 70bps.

I don't think that's particularly good value.  In fact, I happen to think it's a bit of a rip off.

However, I have yet to find a cheaper option.  If I did, I would move in the morning.


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## Qwerty22 (26 Jul 2019)

Marc said:


> By my very rough calculations it would be several years before I saw any profit given the high costs associated with on-boarding a new client - yes, even one who “knows exactly what they want”
> 
> So naturally there has to be a fee paid upfront to reflect the time to meet these regulatory requirements but also to reflect the added value.
> 
> ...



I think part of the problem is that for the person who "knows exactly what they want", they shouldn't have to pay for things they do not need. And this may also include the need for a broker or other intermediary.

In the UK for example you can go online and create an account with say, Hargreaves Lansdown or Interactive Investor. You do not need a broker or advisor. And in cases like Interactive Investor, you have fixed rate charges for managing your investment account or SIPP, so the more you have invested the lower your overall management percentage charges are. For a portfolio of £100K in low-cost Vanguard funds you could be looking at annual charges as low as 0.25%. We need similar offerings here in Ireland. The pan-European pension product regime cannot come quickly enough.

There may be plenty of people who don't know what they want - and they might be in need of your services. But for the investor who does knows what they want, another person in the chain may not be adding any value at all.


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## Investor (26 Jul 2019)

@Marc: I realize that actors in the Irish financial services industry incur high compliance and operational costs.  Every machine has its friction, and the small size and fragmented nature of the Irish retail market doesn’t help.  I’ve read pieces in the _Sunday Business Post,_ the _Irish Times,_ and the _Irish Independent_ over the years in which you were interviewed, and I’m grateful to you for fighting for lower costs and more transparency.  I guess that many people—not without reason—mistrust the financial services industry, and so even the good guys often get tarred with the same brush.  Of course you’re entitled to get paid for your services; I explicitly said as much in an earlier post.  And if you can significantly reduce ongoing charges for investors, then presumably some of that benefit should accrue to you too.

So, to your question “what would be a reasonable upfront cost to pay to set up a pension with lower ongoing charges?”  It’s an interesting question, and the short answer is that for several reasons that I’ll do my best to spell out, I don’t know.

Firstly, there is an asymmetric information problem that creates an imbalance of power between industry insiders and their retail clients, and a consequent atmosphere of suspicion. I have only a fuzzy idea of the costs to the provider of setting up a pension, and so it’s hard to say what would be a fair retail price to pay.

In the abstract, the question of how to divide fairly the savings from reduced ongoing charges between the adviser and their client could be framed as a variant of the ultimatum game from behavioural economics, with which I’m sure you and many of the forum members are familiar.  The proposer is given a sum of money (say one hundred euros) to divide with another player, the responder, who can choose to accept or reject the proposed division.  If the responder accepts, then the money is shared as per the proposal; if they reject the offer, then neither player gets anything.  Narrow economic rationality would suggest that the responder should accept any amount down to as little as a single cent, since any amount of money is better than none, but although experimental results vary widely, responders often reject proposals of under 30%, since they don’t like to feel they’re being exploited.

So perhaps the economically rational investor should be prepared to pay any amount up to one cent less than the reduction in charges (plus some small sum for the inconvenience of switching) to move to a lower cost provider.

Or, perhaps one could frame the question in terms of a fair distribution of spoils between capital and labour.  Arguably, since the investor, in putting up the capital, is taking all of the risk, they should be the one who receives most of the reward.

Suppose, for the sake of argument, that a 50/50 division is fair.  If investor X is paying company A €1,000 a year to manage their portfolio, when it only costs €500 a year to keep the lights on and the salaries paid, then in theory, company B could do the same job for €500.  Company B could then offer to manage X’s portfolio for €750 a year, effectively splitting the savings 50/50.  But there is still €250 of profit left on the table, so in a competitive market, company B would be undercut by company C, who could again offer to split these profits 50/50 with investor X, charging them €625, spending €500 on overheads and payroll, and making a profit of €125.  And so on until in theory all the savings accrue to the investor in a perfectly competitive market...

I’m sorry if it seems like I’m podding through toy examples from Econ 101; I’m just trying to formulate a genuine response to the question you posed by thinking through simplified—but hopefully clear—cases, and going back to first principles to do so.  From one angle, the provider should get almost all of the savings; from another, it should be the investor.  But in a highly _uncompetitive_ market like Ireland’s, the situation more closely resembles the ultimatum game: the pension providers and intermediaries hold most of the cards, and thus end up with most of the loot, which may explain the frustration of many posters on this forum.

More narrowly, the question of how much it would be worth to the client to pay upfront to reduce ongoing charges is a difficult one, because an accurate answer involves several variables, only one of which is known.  It depends on (1) the initial balance, (2) the size of subsequent contributions, (3) the period over which those contributions are made and the associated ongoing charges reduced, (4) the rate of return on the balance invested and (5) the future availability of other options owing to regulatory changes and new entrants to the market.

As a first pass through, if one takes a somewhat arbitrary break even point of ten years out, then one might think it would be worth paying anything under €1,000 upfront to save €100 a year for ten years, but the future savings need to be discounted to allow for the time value of money.

So, if we fix (1), plug in guesstimates for (2), (3), and (4), and handle (5) by assuming that the regulatory and market environment will not change during the given period then the mathematical formula that should be used to answer the question would be that for the present value of a growing annuity.  Let me try a worked example:

Suppose somebody on the median Irish salary of €37,775 has been investing for 15% of their salary for 14 years and has accrued a pension balance of €100,000.  If they contribute €5,666.25 or 15% again this year and earn a 6% nominal return, then at the end of the year they’ll have €112,006, and with a Davy PRSA they’d pay a 0.75% dealing charge of €840.05. (The charge is on the average, not the year-end balance, but I’m using the year-end balance to keep things simpler.)  Assume that their salary grows at a nominal rate of 3.75% per annum, and that they continue to contribute 15%, and make a nominal annual return of 6%.  (I arrived at the salary growth rate as follows.  Assume that a person at the end of a 40 year career earns double what they did in inflation adjusted terms when they started out.  The rate at which a sum of money doubles over 40 years is 1.734%, so rounding up and adding back inflation of 2% gives 3.75%.). Then their pension balance, and thus their annual dealing charges will increase at a rate of approximately 10% a year.  Plugging this in to the present value of a growing annuity formula, one gets:

PV = (P / (r - g)) x (1 - (((1 + g) / (1 + r)) ^ n)), where

P = first payment
r = rate of return per period (discount rate)
g = growth rate of annuity
n = number of periods

In the case above PV = (840.05 / (0.06 - 0.10) x (1 - (1.10 / 1.06) ^ 10) = €9,416

Strictly speaking, since the rate at which the pension fund balance—and thus the annual dealing charges—increases is not exactly constant, the present value of an annuity formula answer is only an approximation.  To see this, imagine somebody who is just starting to save €5,000 a year.  At the end of year 1, they have €5,000, at the end of year 2, €10,000, and at the end of year 3, €15,000.  So the rate of increase from year 1 to year 2 is 100%, but from year 2 to year 3 it’s only 50% etc.  But after a few years, when the ratio of the balance to the contributions is high, this effect is rather minor, so the approximation is quite close.  I worked out the exact figure using a spreadsheet, and the present value came to €10,276.

So, for somebody on €37,775 with a pension balance of €100,000 who intends to keep contributing 15% of a salary that they expect to grow at a nominal rate of 3.75% making a nominal return of 6% on their investments and paying 0.75% in annual dealing charges, the present value of those future charges over the next 10 years is about €10,000.

Suppose a provider or an intermediary can offer a comparable selection of investment options (low cost broad index based funds) and can reduce the dealing charge by 50% to 0.375%.  They’d save about €5,000 in charges over the following 10 years.  If the professional and their client were to divine those savings equally between them, the professional could charge €2,500 to set up the pension into which the €100,000 balance was to be transferred, which is in the ballpark of what an expensive solicitor here might charge in conveyancing fees for handling a property purchase.

I’m not suggesting that this figure of €2,500 is reasonable or fair, or that a 0.375% dealing charge represents good value for money, and there are multiple assumptions I’ve made that could be challenged.  I also agree strongly with @Qwerty22 ’s excellent points that people shouldn’t have to pay for what they don’t need, that there are too many intermediaries in the Irish system that are extracting rents rather than adding value, and that the Pan-European Pension Product can’t come quickly enough.  But I just wanted to work through a possible scenario quantitatively in order to anchor the discussion in some actual numbers.  I’d be interested to know what you think of my analysis @Marc...


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## Investor (26 Jul 2019)

@Sarenco: Did the 100% allocation only apply to the initial premium, or does it also apply to ongoing contributions that you make?  If it applies to ongoing contributions, then an annual policy fee of €150 plus an AMC of 45 bps doesn’t sound too bad, but the 70 bps index tracking error rate that you cite sounds a bit off to me.  As is typically the case with the life assurance companies, it’s hard to get good information from Aviva’s website, but it seems that, for example, Aviva’s State Street Indexed World Equity Fund for which their management charge is 65 bps, tracks the MSCI World Index of developed market large and mid caps.  (I can’t find any specific information about tracking error rates on their website.)

No performance data for State Street’s own ETF that tracks this index is listed on the factsheet on State Street’s own website, as its inception date is less than 12 months ago, but the total expense ratio for the ETF is only 12 bps, not 65, and if you check out performance data for related State Street global index ETFs, expense ratios tend to vary from 12 to 40 bps, and tracking error rates (which include the expense ratios) from 09 bps for an S&P 500 ETF to 55 bps for emerging markets.

It’s possible—it might even be likely—that Aviva are skimming something off the top in packaging State Street’s products as their own unit linked funds, and _maybe_ paying Davy 0.75% and buying similar ETFs direct through their execution only service would be marginally cheaper, but your guess is as good or maybe better than mine.


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## Sarenco (26 Jul 2019)

@Investor

The (effective) 100% allocation only applied to the initial premium.

The €150 policy fee essentially "buys" a 20bps discount from the AMC that would otherwise apply.  That deal made sense in my circumstances - it definitely wouldn't make sense in all circumstances.

The 70bps spread between the unit prices and the net return of the relevant underlying indexes is the (approximate) blended average that I have observed over the last few years.  That spread would capture the AMC, policy fee and whatever other costs the life company decides to apply to my policy.  It's not the spread between the unit prices and shares in the underlying State Street funds.

Again, I don't think it's a particularly good deal.  But I have yet to see a better one in the Irish market.


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## Marc (27 Jul 2019)

Investor said:


> @Marc: I realize that actors in the Irish financial services industry incur high compliance and operational costs.  Every machine has its friction, and the small size and fragmented nature of the Irish retail market doesn’t help.  I’ve read pieces in the _Sunday Business Post,_ the _Irish Times,_ and the _Irish Independent_ over the years in which you were interviewed, and I’m grateful to you for fighting for lower costs and more transparency.  I guess that many people—not without reason—mistrust the financial services industry, and so even the good guys often get tarred with the same brush.  Of course you’re entitled to get paid for your services; I explicitly said as much in an earlier post.  And if you can significantly reduce ongoing charges for investors, then presumably some of that benefit should accrue to you too.
> 
> So, to your question “what would be a reasonable upfront cost to pay to set up a pension with lower ongoing charges?”  It’s an interesting question, and the short answer is that for several reasons that I’ll do my best to spell out, I don’t know.
> 
> ...



Thanks for taking the time to set out a logical argument and as my first degree is in economics I really appreciate the detailed analysis.

I also really like the conveyancing analogy.

I don’t expect my lawyer to live in my house with me but I do expect them to perform a professional service to complete the purchase for me and I’m prepared to pay a reasonable fee for what represents a very significant investment.

By this logic for many people their pension will also represent a significant investment of the same order of magnitude as the house purchase.

Whereas, by extension, a traditional adviser client relationship is more like a landlord and tenant relationship whereby there is a closer ongoing economic relationship between the two parties.

Some investors are happy to pay a rent (ongoing advice fee) others feel that they want to own their own house (pension)

Disintermediation in financial services has been ongoing for as long as I can remember with Big Bang in the city of London in 1986 and the demise of jobbers and the opening up of equity investment to more people.

I was able to trade my first shares in the late 1980s something that would have been virtually impossible before then.

Meanwhile the regulatory pendulum has been swinging back and forth and last year saw a raft of regulations intended to promote transparency and investor protection but naturally has resulted in a significant increase in base costs.

Our custody charges for example have increased from 0.09%pa with a non-MIFID II compliant custodian to 0.30%pa just to be able to meet the ongoing reporting obligations.

Something ironic in a regulation intended to make it clear to investors just what they are paying in annual fees directly resulting in a threefold increase in the fees that they are paying!!! 

I think it should be possible to offer an independent, fee-only consultancy service to meet the regulatory requirements and allow DIY investors the opportunity to make their own investment decisions.

I had to laugh at the reference to Hargreaves Landsdown, one of the worst offenders in taking hidden commissions from investors by promoting “Best Buy lists” but I take the point.

I think it should be possible to offer a fixed fee to arrange a pension structure with an open architecture platform. 

I’ll need to work through how orders would get placed etc but in principle it should be achievable.

There would need to be a comprehensive guide on the underlying structure to replicate the role an adviser would normally take so that investors didn’t try and make transactions against their own self interest - something an adviser should normally catch.

I think the pricing would be something like this

An initial consultancy fee - this would be subject to VAT - an unfortunate by-product of the intermediation in financial services status quo.

The best way to manage costs would be then to refer to another intermediary to implement since that fee could be charged to the pension account (except in the case of a PRSA) and since intermediation is not a VATable activity and could be paid from pre-tax assets (the pension) this would make the most sense for anyone except a VAT registered business.

On an ongoing basis I think it would make sense to offer two charging models to cover the cost of providing ongoing account servicing - this is not the same as ongoing investment advice which would not be provided but rather dealing with essential ongoing account administration like updating Anti money laundering documents etc.


1) an ongoing fee to cover activities like reporting and occasional ongoing admin that would be ordinarily required to operate an account. So maybe something on the order of 10 to 20 bps.

2) the cheap as chips option with no ongoing fee but with all ongoing adviser interventions charged at an hourly rate of say €100pa


My guess would be that it would be possible to offer a pension structure for 40bps plus the OCF of the funds selected 

So an investor choosing the AUM service charge would get a contract for 50 or 60 bps rather than 75. 

An investor paying per use would get their base pension cost down to 40bps or 50bps for a PRSA. 

Dealing in funds would be at zero cost. Dealing in ETFs would be at an additional cost.

The only quirk is a PRSA can only include either zero ongoing or 0.25% 

So that might need to be arranged by way of a separate service charge which may well be subject to VAT and would need a whole heep more thought.

Equally I think you’d be clinically insane to want to run your own ARF without an adviser,  the risk of loss of mental capacity alone makes this an immensely complex product to try to DIY. 

But following the same principles, it should be possible to have a base cost contract at around 0.30% plus an ongoing service fee.


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## Investor (29 Jul 2019)

Sarenco said:


> @Investor
> 
> The (effective) 100% allocation only applied to the initial premium.
> 
> ...



@Sarenco: Thanks for the clarification!  When you say that that 100% allocation rate only applied to the initial premium, does that mean that if somebody were to set up a similar pension plan with Friends First/Aviva into which they wanted to make continuing contributions, they’d face ongoing broker’s fees/contribution charges of 2% on each of those continuing contributions?


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## Sarenco (29 Jul 2019)

Investor said:


> @Sarenco: Thanks for the clarification!  When you say that that 100% allocation rate only applied to the initial premium, does that mean that if somebody were to set up a similar pension plan with Friends First/Aviva into which they wanted to make continuing contributions, they’d face ongoing broker’s fees/contribution charges of 2% on each of those continuing contributions?


I guess it depends what's agreed with the broker - there's no "standard" commission level AFAIK.

However, bear in mind that beyond a certain level annual costs levied on the fund become way more important than the level of commission on further contributions.


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## Investor (29 Jul 2019)

Marc said:


> Thanks for taking the time to set out a logical argument and as my first degree is in economics I really appreciate the detailed analysis.
> 
> I also really like the conveyancing analogy.
> 
> ...



@Marc: My own first degree is in philosophy, so thank _you_ for thanking me for setting out a logical argument   And thank you too for taking the trouble to craft such a thoughtful and detailed response!

It _is_ ironic—though perhaps inevitable—that regulation intended to increase transparency about fees ends up increasing not just transparency, but the fees themselves too!  It’s early days, and I don’t know enough to say whether MiFID II and PRIIPs have benefited or will benefit consumers, though a jump from 9 to 30 bps in charges payable to MiFID II compliant custodians is no mere blip.

Your suggestion that it should be possible to implement an independent fee-only consultancy service that allowed DIY investors to transact on an open architecture platform for the price of an initial consultation fee plus ongoing charges of 50 to 60 bps of AUM certainly sounds interesting.

I’m a little unclear though on why you say that “[t]here would need to be a comprehensive guide on the underlying structure to replicate the role an adviser would normally take so that investors didn’t try and make transactions against their own self interest - something an adviser should normally catch.”  I do understand your concern for your clients’ welfare, but surely the whole point of an execution only service is that it does not involve any hand-holding by an adviser?  Or maybe I’m missing or misunderstanding something here.

If the typical pension investor from my earlier example (somebody on €37,775 with a pension balance of €100,000 who intends to keep contributing 15% of a salary that they expect to grow at a nominal rate of 3.75%, making a nominal return of 6% on their investments, and paying 0.75% in annual dealing charges over the following 10 years) was able to avail of a pension with ongoing charges of 0.50%, then that would represent a saving to them with a net present value of about €3,333.  Thus, if the fee for the initial consultation was significantly lower than that—or if the investor’s pension pot balance and likely future contributions were significantly higher—switching might represent an attractive option.

Even so, the potential savings involved over a 10 year period are not exactly dramatic, which just goes to show how hard it is for small investors—and small operators—to achieve economies in the present climate here.

Another issue with a bespoke pension has to do with the relative dearth of attractive funds available in Ireland.  I take your point that, unlike ETFs, funds can be bought directly from the provider without brokerage commissions and bid ask spreads, but this is not so important where (for example) Davy’s execution only PRSA is concerned, since individual trades are free—at least for ETFs listed in the UK and Ireland—and bid ask spreads generally very low.

(I guess that what this really means is that buy and hold subscribers to Davy’s platform are subsidizing more frequent traders, since the cost to Davy of placing trades is not zero, and, for a buy and hold investor, this is somewhat irritating.  On a related note, I suppose that with AUM pricing models, larger portfolio holders are subsidizing smaller investors, just as young and healthy participants in medical insurance schemes subsidize members who are old and ill, and from the point of view of pension providers, there may be the potential for a similar adverse selection problem...)

Finally, to your point about the unwisdom of managing one’s own ARF owing to possible age-related cognitive decline, I agree that few, if any, people facing retirement ought to forgo the services of a financial adviser entirely, and that ARFs can be extremely complex.  That said, tax and estate planning issues aside, if a retiree purchases a single low cost target retirement income or balanced fund, then the portfolio effectively manages itself, and all they have to worry about is sequence of returns risk and a safe withdrawal rate.  As usual though, the Irish consumer is at a serious price disadvantage: Vanguard offers such products in the UK for between 22 and 24 bps, but comparable funds from Fidelity available in Ireland are over three times as expensive at 75 bps.


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## Investor (29 Jul 2019)

Sarenco said:


> I guess it depends what's agreed with the broker - there's no "standard" commission level AFAIK.
> 
> However, bear in mind that beyond a certain level annual costs levied on the fund become way more important than the level of commission on further contributions.



@Sarenco: Thanks for your reply.  Your point about the relative importance of commissions versus AUM fees as the portfolio balance increases over time is well taken.


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## SPC100 (22 Aug 2019)

Investor said:


> I recently helped a friend to set up a non-standard execution only PRSA with Davy Select, and was hoping to get some feedback on our implementation of the portfolio.  (I’m not a fan of the Life Assurance companies, since so many of their funds are actively managed, opaque, and have all kinds of hidden costs.)
> 
> Here is the plan in outline:
> 
> ...



Well done on laying out and thinking through a full plan!

Ignoring the actual funds you are going to use, and without know other financial details about the person I have a couple of comments.

* I believe a significant amount of the .75% AMC fee might be a commission payment (this post said .5% back in 2012). Who did you organise the pension through? And Can you get something back from them in return for the commission they are collecting? Or did you go direct to Davy?
* I'd lean against reducing to a simple 60/40 with age. IIRC Most of the SWR studies imply better chance of fund not running out of money if you keep a higher amount invested in equities. I know this goes against the 'common' accepted wisdom. I'd rather lean towards having a couple of years of withdrawals in cash before the retirement date, to protect against sequence of returns risk.
* I'd lean more towards 100% now in equity rather than 80/20. And if holding cash, hold it outside the pension.
* I believe this is fairly good value solution for Irish Market, but I think if your fund is 100k> you can potentially get better value.


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## Investor (23 Aug 2019)

@SPC100: Thanks for taking the time to reply to my post.  To respond to your suggestions...


I went directly to Davy, so there's no commission.  The 0.75% AMC is what they charge for a non-standard execution-only PRSA.  I think it's high, but I'm not aware of a better option that is otherwise comparable.
You may be right about a 60/40 allocation, the SWR studies, and a bucket approach to retirement portfolios.  My understanding is that the benefit of keeping a few years worth of withdrawals in cash (or short-term bonds) is primarily behavioural—a matter of mental accounting—and could be risky in a prolonged downturn, but I may be wrong.  As far as I know, the experts still disagree.  There's some good information here , , and  from the Bogleheads.  Todd Tresidder also wrote a helpful little primer summarizing recent research on safe withdrawal rates.
I appreciate that the _expected _return of 100% equities is higher—especially with bond yields as low as they are at the moment—but my friend is a little more risk averse than I am—I have slightly more in equities myself—and I'd be hesitant to advise them to put more in equities until after they've weathered at least one bear market...
I take your point that there may be better value available for larger accounts.  One of the advantages of PRSAs is that there are no charges for transferring one's assets out of them into another pension scheme, so I'll continue to monitor the market, and will keep an eye out especially for the advent of the Pan-European Personal Pension Product, as the value of the portfolio (hopepully!) grows over time.
Thanks again for your post.


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## Red Baron (16 Sep 2019)

What was suggested as a ETF investment was: Stock ETF: Buy or sell Vanguard FTSE All-World UCITS ETF [ticker VWRL] denominated in euros on the Amsterdam Euronext Exchange. My wife has a small davy's select PRSA pension fund - (Beyond davy's costs (and fund expenses)) Are there any ongoing paperwork/tax issues - (I was hoping for on retirement lump sum + taxed as income when drawing down - rather than annual tax paperwork - I was looking for something that looks like an S&P500 tracker - but not picky just confused by all the options - so holding in cash for now.) .


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## Investor (19 Sep 2019)

@Turloch O'Tierney:  Is your wife still making contributions to her PRSA, or is she about to retire and begin making withdrawals?  If the former, is she making contributions herself, or is her employer making contributions for her?  She may need to submit paperwork to Revenue to get the tax relief on her PRSA contributions, but interest payments, dividend payments, and capital gains on investments held within a PRSA are tax-deferred until retirement, at which point _withdrawals _from one's pension account are subject to income tax.  An S&P 500 tracker wouldn't be that bad a choice, but diversifying internationally would make more sense.  One small issue with the Vanguard ETF is that it distributes dividend payments, so they need to be reinvested periodically, but this doesn't matter much in a PRSA, especially one to which contributions are still being made, since they are not taxed as they would be ordinarily.  There are other good options from iShares and State Street Global Advisors that capitalize dividends though, if reinvesting them would be too inconvenient.  You don't say anything about a bond ETF, but your wife should probably not allocate 100% of her portfolio to stocks, as to do so would be much too risky for most investors.


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