On 1st January 2018, the EU Regulation on Packaged Retail and Insurance-Based Investment Products (PRIIPS) came into force. Under the Regulation, if you were making an investment (for some reason it does not apply to pensions) with an insurance company, you had to be provided with certain information on the charges within the fund before you made your decision. The reasoning behind it was to allow people the chance to compare the costs between different costs and funds before they made a final decision on whether to invest or not. It has had the opposite effect.
Under the Regulation, the insurance companies have to show the reduction in yield (RIY). This is a forwarded looking calculation where they have to show the effect potential future charges will have on the growth of a fund. The insurance company have to use assumptions as they are predicting what the charges will be in the future.
Those of you who have invested in funds yourselves may be aware of the Total Expense Ratio (TER) or Ongoing Charges Figure (OCF). These are backward looking, showing the cost of the fund over the previous 12 months. So while most people are used to charges that are backward looking, the EU have asked for a forward looking methodology when pricing charges.
When I saw the Key Information Document (KID), which is the document with all the charges, I was shocked at the high level of fees on supposedly low cost funds. It took a bit of digging to find out what made up these charges. The charges are made up of three sections. All are based on an investment of €10,000.
One-off costs – This shows the cost of the 1% government tax on investments and the highest commission rate payable to an advisor. It will also show any exit costs.
Ongoing costs – This is split between Portfolio Transaction Costs (the impact of buying and selling investments in the fund) and Other Ongoing Costs. These other costs will include the maximum ongoing charge payable to advisors, the percentage equivalent of a policy fee ( a €150 policy fee is 1.5% charge) as well as other costs.
Incidental costs – This is made up of Performance fees and Carried Interests. For most of the KIDs that I have seen, these are 0%.
Advisor fees make up the largest percentage of fees because the insurance companies have assumed the maximum charges payable I have spoke to insurance companies and they have told me:
Hardly any advisors charge 1% ongoing fee, so while it is on offer, why show it as a charge if nobody actually uses this? It is not the reality.
Not all life companies are using the same assumptions either. One company is assuming that a 5% charge is coming off the investment amount (if you invested €10,000, only €9,500 would be invested) while others assume that the full €10,000 was invested.
Others have different maximum ongoing fees. As stated above, one company is assuming 1% ongoing fee, while others assume 0.5% is payable.
The charges levied have to be shown over a period of time. So the 1% government levy is taken off your investment amount at the outset but the charge is show over time as 0.14% (1% over 7 years). But I spotted that one insurance company uses a 5 year investment period, so their charge will be 0.2% (1% over 5 years).
The KID is in the same format Europe wide. But under that format, it does not tell you what is used in calculating all these charges. Even worse, the document states “The person selling you or advising you about this product may charge you other costs”. When I read that, I assumed that the charges provided had no advisor costs in it. It was only after some digging that I discovered that they have all included the maximum fees chargeable.
I have been working in this industry for 20 years. I know how opaque it can be with charges and commissions and have called for more transparency. But this Regulation does more harm than good because it does not explain to people what is the cost of the fund and what is the advisor fee (in reality, you may be paying your advisor a fee, so this charge does not apply).
When making investments with fund platforms which are regulated under MiFID II, you get a dealing cost sheet and a fund sheet with details of how much the fund cost in the previous year. It is is a lot more transparent and easier to understand.
If you have any questions in relation to this, I will do my best to answer your questions but it is such a complicated area even the actuaries who produce these documents in the insurance companies are struggling! My email address as always is email@example.com