A savings economist warns of high fees.
If you own a mutual fund, be aware that there may be some “hidden” fees that you may not be aware of. It’s not easy to spot, according to savings economist Björn-Erik Satim at NordNet.
At the same time, banks and managers have recently increased their fees on a good number of equity funds, and they are charging more fees, especially for passive index funds. Active equity funds are generally getting cheaper.
The total cost of some stock funds is more than 2%. This may not sound like much, but if we take into account that the expected real long-term return on equity funds, according to Finans Norge, is 3.75 percent, it means that in some cases banks and fund managers are running away with more than half the expected gains for Norwegian stock savers.
Sættem said recently Finansavisen (abo) that 33 of the 615 stock funds on Nordnet have a total cost of 2% and more. Total cost means the sum of the management fee and platform fee.
Sættem highlights two well-known Norwegian-run funds from the list: SEF Kraft Global, at a total cost of 2.24 percent and Forty-Tronder at 2.11 percent of total cost. Additionally, it highlights Sissener Canopus with 2.21 percent of total cost, But this is not a stock fund, but is classified as «Long / Short – Other».
– This cost is the highest in my opinion. It is too much, he says, when half of the real expected return on costs has disappeared.
The Handelsbanken Fund is also on the list, with total costs between 2.15 and 2.16 percent.
In the list below, you can see an overview of the worst funds – the 33 stock funds that as of October 22 had a total cost of 2% or more on the Nordnet platform.
swings a lot
The most expensive fund is TCM Africa High Dividend Equity, with a total fee of 3.53%.
It is rare for the cost to be too high. He says that many of the worst funds don’t have many owners – and therefore are not very popular.
However, Sættem highlights two funds, third and fourth among the worst, Thematica – future mobility in US dollars and Swedish krona (different currencies). The total cost is 3.29 percent and 3.47 percent, respectively. In total, approximately 11,500 Nordnet customers in the Nordic region have purchased this money.
A cost of more than three percent is too high. But the fund has delivered a nearly 100 percent return in the past 12 months, so many bought it anyway. What has been popular, Satim says, is a five to ten percent average long-term return in stock funds.
Referred industry funds, such as this tech fund, fluctuate a lot in value. He says that if the value of the fund falls for a year or two, and the manager has to take more than two percent of the annual cost, clients start responding.
Can “eat” a lot of gains
It’s easy to find the total costs, but there may be “hidden” fees on the money that are not easy to see with the naked eye – unless you delve into the details.
The pass fee – or “performance-based fee” as it is also called – can be as high as 20 percent.
It’s hard to say which money has a success fee, Setim warns.
The success fee means that the management fee is variable, and this increases during the years when the fund outperforms a benchmark index, for example the main index on the Oslo Stock Exchange. No matter how poorly the fund performs, clients must pay a minimum fee. If the fund outperforms the benchmark index, say, by 10 percentage points, the manager takes 10 percent of that excess return. This means that the customer gets 8 instead of 10 percentage points of this extra return.
In the list described further in the case, we find, among other things, the Fund of First Chances. Here, the total costs are 2.26 percent – of which the management fee is 2 percent. In addition, there is a success fee of up to 20 percent of the return over the benchmark.
– In 2020, Firstfondet broke the benchmark in the Small Business Index of the Oslo Stock Exchange, and the success fee was calculated at 3.24 percent. Here, unit owners paid a total cost of more than five percent, says Sættem.
Unitholders in the DNB Disruptive Opportunities fund, which also has a 20 percent success fee, paid a total cost of more than five percent in 2020, according to Steam. He says he doubts most unitholders in the fund have acquired them.
– Sættem believes that in most cases, savers can find similar money at much lower costs.
– I don’t know what to pay
One of the Skagen funds, Skagen Global A is another example of a fund that has a success fee. The total annual rate is 1.10 percent, while the success fee is 10 percent of the excess return.
Sættem at Nordnet believes that the model with a pass fee goes against the purpose of the regulations (MIFID II), which will provide better investor protection, increased transparency and a better cost overview for clients.
Many fund customers don’t know what they are paying because the total cost is only known then. Sættem says success fee models are also hard to understand, and you have to click on them to find all the costs.
– But is it somehow “cheating”, since it is difficult to know all the costs?
– No, I can’t say it is. But in order to get good salaries. They’re betting the client doesn’t fully follow, he says.
Sættem says managers defend the practice of success fees by saying that they only make more money if clients make a lot of money — that is, when the fund outperforms the index. He doesn’t think this is a good enough argument.
First, the manager will also calculate the success fee when the value of the fund goes down, as long as it is below the benchmark. Second, I think the minimum fee for funds with a pass fee should be much lower than the average flat fee for other funds in the same category, he says, and he says it should be less than one percent.
However, Sættem points out that even both DNB and First have a so-called “high water mark”. This ensures that the success fee can only be activated when the stock values once again reach the historical maximum value – the “all-time high” of the fund.
– It’s good, so that the fund can not collect the same surplus return several times, he said.
Sættem notes that the DNB has notified Nordnet that it will reduce the pass fee from 20 to 10 percent, and that this will happen in the first quarter of 2022.
– more excited
Jorge Jensen, director of finance at the Consumer Council, told Nettavisen that success fees contribute to making it more difficult to know what to pay. At the same time, there are benefits, too.
In theory, a pass fee is a good idea, because managers will be especially motivated to put in a good effort. He tells Netavisen that they are getting a carrot to reach her.
However, he cautioned that fund clients may end up paying a lot of fees if the success fee is set up incorrectly. He says the Consumer Council has conducted surveys to find out what the criteria for a success fee are so as not to annoy customers.
Jensen says there are three things that must be in place to create a good success fee system.
One is that it is a benchmark it relates to, and the other is that the success fee has a degree of uniformity, which means that customers pay less when things go wrong. The third is the high watermark, which means that you avoid paying the pass fee for good performance multiple times. If you pay every time the market goes up, you risk paying too much, he says.
– It must be real
Brett Heligerdi, head of mutual funds and investments at Finanstilsynet, says they won’t comment on what they think of the 20 per cent success fee.
We don’t want to comment on level models or prices in individual boxes, she says.
However, Hjellegjerde explains their opinion on the fact that some funds require a success fee.
If the success fee is to be taken in addition to the fixed management fee, it is critical that the account model be designed according to criteria that ensure that the interests of the unit holders are taken into account, she says, and indicate:
It is important that the benchmark against which the return will be measured is adequate, so that the excess return to be shared between the manager and the investor is real.
Finanstilsynet assumes that the fixed pay in a fund with a performance-based pay is lower than similar funds without such an addon, it says.
Meanwhile, she noted that general requirements for dealing with conflicts of interest must be taken into account if funds are to take a success fee.
new Requirements from the authorities in 2018 It causes banks to make changes to money savers. Both international regulations and the authorities in Norway want a clearer distinction between the costs borne by the producer and the distributor. This is because those with a platform to buy and sell money must document that the pay they receive improves the quality of service.
Fund companies now split costs into two prices, showing customers what they’re paying for.
The split has lowered the cost of some funds, but they are primarily active funds. Hallgeir Kvadsheim said index funds have become partly more expensive both at Sparebanken Vest and a number of other banks. To Nettavisen earlier this fall.
One is the management fee and the other is the publishing fee – or platform fee. Those who offer a platform to save money must have funds for marketing, reporting to authorities and the like.
The brokerage fee/platform fee replaces the income previously earned by distributors from return commissions to cover services such as distribution, marketing, customer service, tax reporting, guidance and advice.
Kvadsheim reacted last month to Sparebanken Vest’s release of information that they will have a 0.7 per cent brokerage fund for index funds from October 1. Most of them own 0.3 percent, Quadsheim said. However, Sparebanken Vest lowered the brokerage fee to 0.35 per cent based on all the feedback they received.
– fair way
Communications consultant Carrie Vartdal-Rice at DNB explains why some funds are charged a success fee.
An actively managed fund aims to beat the benchmark against which it is measured, i.e. make it better than the market. Therefore, these funds also cost somewhat more than an index fund. In low fixed-price and performance-based funds, we share risk with the client and charge additional fees for active management only if the fund performs better than the index. We think this is a fairer way to make money, as I wrote in an email to Nettavisen.
Riise also states that the funds also have a so-called high water mark, which means that if a fund has a return below the benchmark, it must be reclaimed before it can be suitable again for performance-based fee calculating.
According to Riise, DNB has three equity funds where the customer can only choose the fee based on performance. These are the opportunities for DNB disruptive, DNB Nordic Small Cap and DNB India.
– For the DNB Disruptive Opportunities Fund, the client earned a return after fees of 64.2 percent in 2020. The fund’s benchmark index achieved a return of 12.93 percent. It adds that the client’s relative excess return was thus 51.28 per cent.
– Is it true that you should lower your success fee 20 to 10 percent in the first quarter of 2022?
For many funds, it has been decided to reduce performance-based fees from 20 percent to 10 percent. These companies include Nordic Small Cap and DNB Disruptive Opportunities. This is done to align the price structure between funds set up in Luxembourg and funds set up in Norway, says Reyes.
It cannot say exactly when the pass fee will be reduced.
– This requires approval from the Luxembourg Financial Supervisory Authority, so we don’t know when the fee will be reduced, she said.
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