Most Irish residents that invest in assets classes other than deposits and direct property will do so by purchasing a product created by a Life Insurance company. As a result, there are 3 main fees or charges that an investor needs to be aware of. These are listed below:
Upfront fees or commissions:
These charges are typically paid by the life company to the distributor or salesperson of their product. This can be a Financial Broker, a member of their own staff or in the case of a bank a member of the bank’s staff.
Typically, these fees are paid by the life company up front to the distributor when the deal is closed, and the life office receives the funds.
Ongoing management and administration charges:
These are fees that are paid out of the fund in which you are invested. They are calculated as a percentage of the total value of your fund. The majority of these are paid to the fund manager for making investment decisions and manging the fund. A portion may also be paid to the distributor as a trail fee for the purposes of providing ongoing advice to you. There are also some expenses that are paid to other service providers who do things like provide safe keeping for the fund’s assets and provide legal advice and company secretarial services for example.
Taxes:
In Ireland life wrapped funds are subject to 2 taxes. The first is the life levy. This was imposed during the financial crisis. The Life levy is currently 1% of the original amount invested. The second major tax is exit tax. This is currently 41% of any gains the investor makes in the fund. It is collected when the investor exits the investment or on an eighth-year anniversary of original investment date.
Fees are a necessary evil. Without them there would be no service providers and consequently no opportunity for non-professional investors to take advantage of the investment opportunities provided by growth assets like stock and shares, commercial property and bonds. It is important however to understand how and what you are being charged. Fees and charges in the Life wrapped investment market are complex and confusing. At Foundation Stone Financial Planning Limited we will consider charges based on the likely impact they will have on a client’s long-term returns. As we are a fee for advice service obtaining the best true value for money is part of our mission.
Here is an example.
If two investors have €100,000 to invest and they have decided to invest in a level 4 risk fund from ABC life office, on the same day.
Investor A. Receives an increased invested amount from the life company of €102,000 and pays an annual charge of 1% per annum.
Investor B. Receives a reduced investment amount of €99,000 and pays an annual charge of 0.5%.
Based on the above which is the better deal. Many investors will select the same option as Investor A.) This is because they feel immediately better off and they do not have a sense of the effect the increased management charge has on their investment growth. The Investor Option B.) feels like they are paying a charge out of their investment and that they are starting at a loss.
Let us assume that the fund now grows at an annual rate of 6% and the investors hold it for 10 years and we ignore taxes. Investor A.) would have a fund value of €139,741.12 and Investor B.) would have a fund value of €142,347.81. This is a difference of €2,606.69. Remember they invested the same amount in the same fund with the same manager over the same period. The only difference is that Investor B.) paid lower annual charges.
The lower annual management charge becomes even more important the longer you remain invested and the higher the growth rate of the fund.
My message is be careful when considering what you are going pay and seek a financial planner to review what is the best charging structure for you.
