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Industry could be overstating Mifid costs

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Nathan Fryer, managing director at paraplanning outsourcing firm Plan Works, said that some advisers are already getting a push back about these additional costs from clients, yet advisers should be wary of solely focusing on the lowest transaction charges.

With active fund managers, it risks tilting selection in favour of closet trackers, he said. In terms of passives, Fryer added the new disclosure regime could favour synthetic strategies rather than standard index trackers which own the stocks and thus incur greater transaction costs.

Anomalies

Having studied the initial Mifid II disclosures since the start of the year, Fryer said advisers need to be careful not to misinterpret these initial numbers and warned of anomalies, highlighted in a note published this week.

He said that, to date, “the reporting is not a true reflection of the trading costs but rather a reflection of the regulation approved calculation methods used to calculate the expected trading costs”.

Fryer said the reporting requirements mean that fund managers are calculating costs on the basis of three previous years’ trading to a specified calculation. This year’s ex-post trading costs, which are likely to be more accurate reflection of a manager’s trading style, will only be published in 12 months’ time.

The note continued: “A fund management house may execute multiple trades of the same stock at different points during the day as different fund managers’ trade on their funds. It can be difficult, from a systems perspective to match all historical prices traded with the price that the market showed at that time.

“For this reason, the regulation allows the fund to report the market close price instead of the live price to make it easier to calculate. This can lead to vast differences in prices between the price traded and the price at market close. This is then reflected in larger assumed transaction prices though it also has the potential to lead to negative prices.”

He said asset managers are working on systems that will price more effectively.

Understand what you are buying

Speaking to our sister publication Portfolio Adviser, he added: “I think we are seeing significant overshoot. However, we need to remember that trading costs occur both on the way in and the way out and the same methodology applies. One would hope it would even out, but it would really depend on market volatility on either side of the trade.

“I have heard examples of end clients beginning to question the additional costs and I don’t think advisers can be seen to be belittling the methods of calculation as an excuse, although we all know that the methodology is almost meaningless.

“What is important is for advisers to understand what they are buying. If you are buying a passive fund that purchases the individual stocks in the index to be able to replicate it, then you will see fairly chunky trading costs. However, if you are buying an index fund that synthetically replicates an index through futures then these costs will be reduced.

“The issue with synthetic index trackers is that you don’t get the dividends, you don’t get voting rights and you expose yourself to counterparty risk. When buying active funds, you almost want the trading costs to be high, otherwise they are simply being a closet tracker.”

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

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