Granite guidance

Does it all end in TERs?

What is a TER I hear you ask?
It is a TLA (three letter acronym) that the financial services industry loves using.
A Total Expense Ratio or TER is neither the total expense or a ratio but it represents part of the charges an investment fund suffers. It is a typically shown as a percentage and is now more commonly known as an OCF (ongoing charges figure) and covers the annual management charge and some associated running costs such as administration costs, audit and legal fees. A typical fund may have an annual management charge of 0.75% but the TER or OCF will be higher once added costs are factored in.
So that is what I pay then?
Well sadly not as there are other costs hidden from view which add to the overall cost of fund ownership and often substantially. Dealing costs such as brokerage fees, bid offer spreads, market impact costs as well as stamp duty. Various studies have shown that trading costs can easily outstrip the quoted TER if a fund trades frequently. A research paper by the Financial Services Authority in 2010 estimated that the average transaction costs of trading for UK large cap funds was 1.8% (based upon 100% of asset turnover). Costs are even higher for smaller companies and emerging markets where the transaction costs can be eye wateringly high.
What does it mean?
During my spell in London we analysed a portfolio held with a private bank and once all dealing costs were added the overall costs were in excess of 4% per annum. This sadly was not an isolated case but the client was completely oblivious to what he was actually paying. The outcome? His portfolio was significantly underperforming the benchmark which was not surprising given the huge cost hurdle to overcome.
Do Costs Matter?
Costs matter in the fund management industry and are one of the mains reason active fund managers typically underperform the market over the longer term. Fund performance can't be guaranteed but costs can be controlled.
Need Help? 
If you are worried about TER’s or OCF’s get in touch with GFP (Granite Financial Planning) who can help assess the real cost of your investment. Contact Paul Gibson on 07429-152157 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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