Arch Cru charges: why double charging also affects wrap users

No active fund TER gives the full picture of the true costs faced by the investor. This is particularly true of fund of funds where the generally astronomic TERs quoted do not even include the individual TERs of the funds into which they invest. In many cases these funds need to achieve over 4% per annum just to keep their heads above water....

The picture is equally dismal in single strategy funds where dealing costs are ignored. The average portfolio turnover in the UK all companies sector was apparently 90% in 2008 and this equates to an additional charge of around 1.5% which would not show up in any published TER..

Is it any wonder that no one consistently outperforms the appropriate index?

I agree. Having realised recently that Total Expenses Ratio does not actually mean just that I am amazed that this issue has not been brought to the fore not even by our own industry press. Perhaps it is something that lots of industry people are aware of but for some reason not discussed. A bit like MP's expenses!!

Trying to actual obtain the true cost to the client from the investment companies is like pulling teeth with some still denying it even exists.

It clearly seems that the IFAs recommending their clients to ARCH cru funds were highly motivated by the fees (trail income).

cru was aware of the double charging of fees as they had an agreement with ARCH where they would receive a share of any upfront fees generated from the newly launched 'ARCH cru Finance Fund' investing in the Guensey Cell companies directly. This was further motivation for cru IFAs to switch their clients from the 'Investment Portfolio' to 'Finance Fund', generating significant fees for themselves in the process (higher trail income)

The IFA model is slowly changing from Independent Financial Advisers to INCENTIVISED Financial Advisers

Just to keep things balanced - whilst not as extreme as active funds. Full TER's on passive funds (especially Dimensional) can be proprtionately greater (against quoted AMC) than their active peers.

The value chain gets worse for the customer!

Don't care much for dimensional myself either. We run our own range of ETF based portfolios.

Calculating the cost of investment management within ETFs can be pretty straightforward and perhaps most importantly, easily understood by a client ....

The TERs of swap based ETFs (eg Lyxor) is pretty much what it says on the tin as the contract provides the return of the index less the managers charge.

Fully replicated and sampled ETFs (eg iShares dublin domiciled funds) tend to have an relatively small additional cost to add to TER to cover dealing costs (iShares FTSE100 = 13bps) however, when it comes to measuring the true cost of an ETF it is a simple matter of measuring the tracking error against the relevant index. In many cases the tracking error of fully replicated funds (iShares again...) can actually be positive due to additional returns generated by the manager from stock lending.

Balance restored.....