The implementation of Mifid II will highlight how high fund transaction fees can be, with some as much as 500 per cent of the quoted ongoing charge figure.
Independent fund research company Fitz Partners calculated transaction fees from audited fund accounts and measured the impact they would have on funds’ OCFs when both costs are aggregated.
Trading fees can multiply the disclosed annual charges by up to five times and can even bring ETFs overall costs above those of some active funds, Fitz Partners found.
The research revealed OCFs increase on average by 21 per cent for an equity fund, 29 per cent for index trackers and 26 per cent for ETFs.
Hugues Gillibert, CEO of Fitz Partners, says: “Adding 20 basis points of trading fees to an OCF of 100 basis points is not really welcome, but certainly not as impactful as adding the same 20 basis points to a lower OCF of say 25 basis points. In the last few years, most funds including ETFs have been lowering their OCFs quoted to investors. With the implementation of Mifid II, trading costs will become more transparent and allow investors to refine their investment choice.”
Gillibert adds: “The industry will benefit from further transparency on trading costs and it would be best disclosed at the point of investment alongside the fund’s OCF and subscription charges as well as platform fees. Equity funds remain the asset class with the highest average trading fees at 20 basis points, a level still below most platform fees.
Despite much of the industry pushing back against ‘closet tracker’ funds, Fitz Partners found that in terms of trading costs they can actually work out cheaper than ETFs.
“Our research shows that whatever the product, managing money requires transactions and attracts costs,” Gillibert says. “The growth in smart beta ETFs is one of the reasons for the overall increase in trading costs for ETFs. Remarkably, index tracker funds remain on average better value after trading costs, when comparing with ETFs.”