Q.  I have received advice to rebalance my investment portfolio and I note that I am being charged fees by the fund managers for the transaction.  My Financial Planner assures me that there are no switching fees but these costs are referred to as a “buy/sell” cost.  What is the difference?  How do I calculate the cost and should I be concerned? I’m not too impressed!

 

A.  When you invest or divest money in a Managed Fund, the fund manager may incur costs such as broking, stamp duty, taxes and other transaction costs to buy or sell the underlying assets in the managed fund portfolio.  The fund levies these costs to the investor who is entering or exiting the fund.

The cost of the transaction is referred to as a “buy/sell” spread and is an estimate of the costs associated with the purchase or sale of units in the fund.   Existing investors in the fund are not levied these costs as it would be unfair to penalise fund members who are not creating the costs. In contrast a Management Expense Ratio (MER) or Indirect Cost Ratio (ICR) is the ongoing management cost of the portfolio expressed as a percentage of the funds under management and is levied against the entire fund before they declare a unit price.

The buy/sell” spread may vary depending on the flow of money into or out of a fund.  For example if a fund has a nett inflow of funds, they may not have a sell spread as they are not having to sell the underlying assets in the portfolio.

Details of the buy/sell spread should be disclosed in the Product Disclosure statement (PDS) of the fund.  Buy/sell spreads will vary depending on the type of assets being bought and sold and the complexity of the underlying portfolio.  Buy/Sell spreads will typically vary from between .05% for assets such as fixed interest up to around .3% for property.  So if the average buy/sell spread is say .18% and you are switching $500,000 of investments, then the cost will be $900.  The cost of the buy/sell spread is usually expressed as a unit entry and exit price.  The difference between the two will be the spread or cost.

Some funds may charge a unit switching fee.  These costs can be up to 1%.  So I believe your adviser is referring to this fee not being applicable.  As to whether you see a buy/sell spread as a switching fee is a matter for debate between you and your Planner.  Bottom line, there are costs to buy and sell the assets of a portfolio and someone pays them.  The logic being the fees should be incurred by those creating the cost.

Your Financial Planner may have very good reasons why they wish you to rebalance your portfolio; They may wish to rebalance your portfolio to reduce risk or reorientate the portfolio to a risk profile aligned to your needs.  They may feel there is a reason to remove a fund manager or replace a manager with an alternative manager with better prospects.  Your circumstances may have changed and you may need to make changes as a consequence.

Ask your planner why they are recommending the change and if you are unhappy with the reasoning, seek a second opinion.