5% contribution charge... why is nobody complaining?

Charges

Have just read this thread for the first time and feel there is a mis-conception that has been left alone but requires clarification.

An entry charge of 5% and annual management charge of 1% does not equte to annual charge of 6%. Extopia seemd to think that with an assumed growth rate of 6%, you're simply paying in charges what you expect to receive in rertuns.

This is flawed thinking.

Example:

100 invested per month
1,200 invested in year 1
5% entry cost = 60.
In addition, 1% of the fund value is deducted daily, or 6 euros.
Lets' assume 6% growth.

So let's assume that there's 1,202 in the fund after 12 months.

This money has paid its entry charge and now is set to grow by the 6%, or whatever the year two return ends up at.

How else could an outlay of 36,000 over 30 years (assuming flat 100 per month) end up being worth over 75,000?

If the charges and growth were the same, you'd just get back the 36,000.

Expotia seems to base his/her stance on the application of an annual management charge of 6%.

Anyone see what I'm trying to get at? (not very well it must be said)!

Rgds,

Ali

5% Entry Charge

If you pay €100 a month and there is a 5% entry charge then only €95 of your €100 gets invested.

From your point of view €5 goes down the drain every month for nothing.

5% Entry Charge

Very similar to drinking alcohol !

Reduction in yield.....

Allison you are correct in your logic. To illustrate the point. Assume 6% growth and 1000 invested day 1.

Value day 1 - 950
Value end year 1 - 997.50 ( increase of 5% net on last year )
Value end year 2 - 1047.37
Value end year 3 - 1099.74

So as you can see, your fund goes up as time moves on provided the rate of growth is in excess of 1%.

Roisin
"For nothing"?. Well that's the debate.

Exactly the point I was trying to make earlier

In fact for a person paying contributions for 20 years, increasing the contributions each year by say 3%, the total affect of the 1% management charge and 5% contribution charge is equivalent to a 1.6% management charge and no contribution charge. I think it's funny that extopia is getting all worked up about the 5% charge when the 1% charge is actually bigger!

Note that this answer depends only very slightly on the investment return assumed e.g. for 0% investment return, the answer is 1.58%. for 6% investment return, the answer is 1.56%.

Good value for money

What I find amusing in this thread is the fact that there are options out there where there will be no 5% just 1% sliding to 0.85% (see LA Brokers thread) but this is for execution business only. Does one know that this is the right product for them ? Also just because something is cheapest doesn't necessarily mean that it is the best. Brendan I think the Indo is guilty in this department. When SSIA's were been bandied about - Quinn Life & EBS were quoted as "best deals", by virtue of their lower charging structure. (By the way there is a lot of out of date and incorrect figures in the paper quoting rates and premiums as a by the by).The same principle was applied to Equitable Life. Like many industries, there are people who know what they are talking about and those that don't but give the impression that they do. Frequently one sees questions posed about fee based advisors, commission based brokers versus say bank people. My experence is that there is no free lunch. If someone is looking for financial advice, recommendations are good but do the people who recommend know what they are talking about ? I used to be in the financial services industry working as a broker consultant/inspector and I believe they are the people who are in a great position to know if a broker is good or not. I know some very successful brokers (money that is ) who I wouldn't take a heed of advice from !

Re: Good value for money

Frank,
I made this point in another forum.
The concensus fund tries to have growth that is about average. Its described as a medium growth/risk fund.
If you have more than 15 years to retirement you may want to be risking your money a little more to try and get that fund as big as possible.
Concenus should be there in the last 10-15 years before retirement to get the money securer.

S

Re: Good value for money

Hi Savy/Frank - Do you have any evidence that shows that active investment management (usually attracting higher charges) beats passive index-tracking (e.g. Quinn Life) consistently, over medium/long term?

Re: Good value for money

rainyday,

Do you have any evidence that shows that active investment management (usually attracting higher charges) looses out to passive index-tracking (e.g. Quinn Life) consistently, over medium/long term?

Re: Good value for money

rainyday,
I never said that active beats a passive tracker-index.
I'm talking about the irish Life concensus product which looks to see where other funds are being invested and reacts to that.

I'd like to know what type of time-delay is there.
Is this done daily.Or does some guy spend one day at the begining of each quarter matching the investment strategy of the concensus fund with some average of the actively managed funds.
Its not much of a comparison but according to the pension performance of the first 6 months of this year, the irish Life Concensus had a return of 3.5%. The average performance(excluding concensus funds) was 3.7%!

S

Re: Good value for money

Hi Sunshine - How about this highly respected financial analyst? But surely the onus should be on those charging higher fees for their 'active' fund management to demonstrate the 'added value' (if any) that comes from this active management.

Hi Savy - You might get some info from ILIM's website. I have a vague memory of hearing an IL rep saying that they rebalanced the fund quarterly, but please don't stake your life on that.

The solution.....

Wich way to go Active Managed / Passive Managed / Consensus fund. Get yourself a monkey:

[broken link removed]

Re: The solution.....

Rainyday,
I was reading through some information on the ilim web page and the rebalance the fund monthly.They say that others do this quaterly.

Alan, how is the monkeydex index doing these days?
S

Monkey Fund Managers.......

The monkey lost in the long run but was it a fair fight?

For the last 14 years, Wall Street Journal reporters have thrown darts at NASDAQ stock listings, choosing stocks to compete against the picks of professional investors. This experiment was prompted by Professor of Economics Burton Malkiel *64’s book, A Random Walk Down Wall Street, published in 1973. In it, he suggested that a "blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts". The journalist’s nonscientific experiment concluded last month. The experts fared better than the dart-throwing journalists. But Malkiel blames that on publicity — the WSJ advertised the stocks that the experts picked.

Good Monkey

I sure the monkey only charged peanuts and not 5% and 1% of the fund.

Good one......

Thats brought a smile to my face.

I think it's funny that extopia is getting all worked up about the 5% charge when the 1% charge is actually bigger!


Well that's why I said 6%+... I think everyone who did those little sums to show growth would have to agree that the returns would be higher without the 5% contribution charges.

Frank, we are all aware that there are options out there where you don't have to pay the 5%. I started this thread because I was amazed at how few people out there in the general media seemed to be questioning the 5% front load.

Glad it turned into such a lively discussion!

No need for a contribution charge

Extopia,

You are right to question it. The front loading of 5% is crap and consumers have no real need to pay it.

Most of the replies you are receiving is actually propaganda from members of the 'Preserve our commission movement' take it with a pinch of salt and pay no heed to it!

Sumatra

0%

Extopia,

If you want a 0% charge on contributions and a 0% annual management charge, keep the money in your pocket.

Re: Reduction in yield.....

Alan said"

To illustrate the point. Assume 6% growth and 1000 invested day 1.

Value day 1 - 950
Value end year 1 - 997.50 ( increase of 5% net on last year )
Value end year 2 - 1047.37
Value end year 3 - 1099.70

I make that to be €99.70 growth on €1000 invested (and no more contributions made) after 3 years. What's your point here, Alan? Should I be excited about making less than €100 on this investment after 3 years, in a market growing at 6% p.a.?

If you want to try to bamboozle the plebswith sums, at least make a compelling argument.