How are annual management charges calculated?

Let's say that I invest €10,000 in an Irish Life product and the annual management charge is 1.5%.

The unit price when I buy it is 1,000.
There is no growth the first day.
The unit price at the end of day 1 will be 1,000 - 1.5%/365
so the unit price will be 999.85 say.

But what happens if Johnny invests in the same fund on a nil commission basis, and gets an annual managment charge of 1%.

He sees the same unit prices as I do.

Is it not the case that they allow for the difference by increasing the number of units allocated to the plan?

Hi Sumatra

Do they do this each year?

Sumatra said:

Is it not the case that they allow for the difference by increasing the number of units allocated to the plan?

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Maybe, but do they actually do this ? Moreover how is an investor meant to check the correct allocation as there is no facility in Ireland that has an historical database of daily or monthly unit prices.

Brendan, my understanding is the charge is deducted from the fund each month. The reduction in yield figures are supposed to illustrate the eroding effects of charges over a given term. One can compare this to a full commission product but many of these projections are the fiction in that their accuracy depends too much on assumptions that are difficult to accurately predict in the first place. Different funds have different charges and these charges can change at any time so nothing is set in stone. Some companies charges are reflected in the price of the units or can be taken by cancellation of units or a combination of both.

Mercman, in all honesty I would have to agree with you and say there is no transparency when it comes to being able to check the correct allocation has been applied. Many customers do receive letters from time to time informing them that an error was made and that additional units have been added to their plan as a form of compensation (although they don't use that word). Now I know from exams in Maths you can't just give a figure as an answer, you have to be able to show line by line how you arrived at the figure).

Your point ties in well with Brendan's initial question. Are there any fund managers out there that could explain?

Given all that, star performers still attract more money into funds on the basis of recent performance. Personally I've always felt some sort of performance related AMC would be fairer and it would allow investors to be more vigilent in responding to performance?

Given all that, star performers still attract more money into funds on the basis of recent performance. Personally I've always felt some sort of performance related AMC would be fairer and it would allow investors to be more vigilent in responding to performance?

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Sumatra

I really want to get my head around this charging issue. I have no problem with you discussing other issues, but please start a new thread.

Sumatra said:

my understanding is the charge is deducted from the fund each month.

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This is a critical and important comment. No one (being Joe Public) actually knows if it is daily, weekly, monthly or annually. I have it in writing that the same funds are deducted monthly on one sheet and annually on another.

The only correct way to check this correctly is to have the services of an Actuary to hand who should be able to assist an Investor. But their services are expensive and timely, and as important only yields a small correction amount, far lessor than the cost of an actuary, if found to be error based. And then try and obtain the daily prices for checking !! Not possible in Ireland. Now here is another note for the Regulator.

Sumatra

That is very helpful.

The actual level of charges may be higher or lower than this. The section on variable charges below explains the reasons for this.

We take the fund charge as shown above but then add back units to your investment each month to reduce the effect of the charge. The
amount by which we reduce your fund charge each year is shown on your investment schedule. Your effective fund charge each year is the charge
shown in the table less the reduction shown on your schedule.

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This does not directly answer my question,as it relates to products with variable charges.

But it does show how it could be done for an ordinary fixed charge product which is done on a nil commission basis.

Would you have the explanations from any of the other fund managers?

Brendan

Technically management charges are not fixed and can be varied at any time in the future. Illustrated for example in Eagle Star's terms & conditions thus:

"Eagle Star may increase the management charge to allow for the effect of inflation on its expenses, as measured by the Consumer Price Index or some other suitable index of expense inflation. Eagle Star may also increase the management charge if there is a significant difference between the costs of maintaining existing policies and the charges that Eagle Star is recovering from these policies."



This would apply iresepective of what level of commission the intermediary charges to the best of my knowledge a policy set up on a nil commission basis cannot be altered at a future date to pay intermediary commission.



Regarding your query on other fund managers then I quote below how Eagle Star deal with it. It is interesting to note how they treat external fund managers:

"Eagle Star will deduct a management charge expressed as a percentage of your Unit Account. The initial management charge percentage is specified in the Policy Certificate. Eagle Star will deduct the management charge either directly from the Unit Fund(s) or by cancelling units held in your Unit Account at the Bid Price or by a combination of both."

"Mirror Funds may be subject to higher management charges than the percentage specified in your Policy Certificate. For example, Mirror Funds that are linked to assets managed by Threadneedle Investments are subject to an additional management charge of 0.5% per annum Eagle Star will deduct any extra management charge either directly from the Unit Funds or from your Unit Account or by a combination of these methods. If you choose to invest in Mirror Funds, Eagle Star will provide you with details of management charges applying to these funds. If you choose to invest solely in Unit Funds where Eagle Star takes all decisions relating to investments, the management charge specified in your Policy Certificate will continue to apply."

Boss, in your example, yes the unit prices are the same for both. The difference in value is then achieved by the cancellation and/or addition of units at the policy level rather than at the fund level.

Duke of Marmalade said:

The difference in value is then achieved by the cancellation and/or addition of units at the policy level rather than at the fund level.

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As I have already posted, in my case whence I was supposed to be on a discounted Management Charge, no additional units were added and a further 1% was deducted. So in all I am paying 2.5% MC instead of the lower agreed charge. Posted here previously:http://www.askaboutmoney.com/showthread.php?p=898769#post898769

Note: Edited by Brendan to fix link
http://www.askaboutmoney.com/showthread.php?t=106315&highlight=bank+ireland+life

I have been advised that there is also another approach. Some companies have different series of the same fund for the different levels of annual charges.

Brendan

I was going to mention that point but was in fear of going off the main topic.

This is not a great mystery. There are two ways to take fund related charges:

1) Internally within the fund. This comes through as a reduction in the unit price whilst leaving the number of units attaching to a policy unaffected. This type of charge is usually physically deducted monthly although it's size is usually described as it's annualised value. For example, "1% per annum deducted monthly". This is in fact 1/12% per month which actually is less than 1% deducted annually because of compounding but in presnet value terms is more or less the same as it is deducted on average earlier than a charge deducted annually. In short, there is no scam here.

2) By cancelling units at the policy level. This is usually done at annual intervals. In the case referred to in OP the cancelling would need to be in reverse i.e. the addition of units to (partly) counteract the underlying fund charge.

Where there are clearly distingusihable levels of charges e.g. a different charge for Regular premiums than Single premiums or different but distinct commission versions, it may be more convenient to have several versions of the same fund using different type (1) AMCs. Their unit prices will diverge slowly from each other to reflect the different AMCs.

Where a great level of flexibility is available it is more practical to have a mixture of type (1) and type (2) charges with the latter giving the flexibility.

A third way Duke is the possibility at a future date to actually change the charging structure.

Really doesn't have much to do with present values For the retail investor it follows two stages.

Stage 1
The asset management company charges typically 0.75% PA. This can be higher but this is the standard rate on Irish managed funds and is the rate charged to institutional investors eg charities, large pension funds etc. This is charged internally on the total asset value of the fund at each valuation date. This can be accrued daily, monthly, quarterly. Roughly speaking, if you were to take the average asset value of the fund over the year and calculate 0.75% you wouldn't be two far away (however its important to note that this might not be the case over the past 24 months given volatility in asset prices)

Exact calc: management fee /365 X Daily asset valuation (AUM)


This is accrued daily and will give you the exact fee and is typically charged quarterly

Stage 2
Retail investors(joe bloggs) pay around 1.5% management fee and also pays as much as 3% on each cashflow e.g each time you pay money in they charge you 3% on that amount.

This added charge is not a managment fee per se although that may be what its described as. This is used primarily to pay the commission to independent brokers and banks who sell the product to you and I. To a lesser extent this also covers the added admin costs that arise from small investments (retail).

This really is commission (if you invest enough they may waive some of it) I would say its extortionate but thats just my opinion. you can invest in Rabbo funds at an institutional fee and they offer superior products than are typically offered in the Irish market place, however YOU have to decide what you want to invest in.

There is a big difference between the unit price on the asset manager quotes and the unit price that you recieve because of all the additional charges

The extra commission that is charged in a way pays for the investment advice you recieved from your financial advisor or bank representitive- so I hope it was correct and competent advice. God knows you pay enough for it!

Apologies if I seem patronising with all the examples but I think it helps illustrate the points better.

Insider, thats helpful thanks. Anychance you could do an example showing the math for Brendan's example (post 01) of an investment of €10k at an AMC of 1.5%?