Should you worry if you are charged rebalance fees?
ANDREW Heaven, an AMP financial planner at WealthPartners Financial Solutions, talks about whether you should be concerned about being charged by your fund manager for rebalancing your managed funds portfolio.
Question: I have received advice to rebalance my portfolio of managed funds. I note that I am being charged fees by the fund managers for the transaction.
These fees are referred to as a buy/sell cost. My financial adviser told me that there would be no switching fees. These look like fees to me!
What is a buy/sell cost and should I be concerned?
Answer: 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 cost or 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 members of a fund who are not generating the transaction costs.
In contrast, a Management Expense Ratio or Indirect Cost Ratio is the ongoing management cost of the portfolio expressed as a percentage of the funds under management and is levied against the entire managed fund before they declare a unit price.
A managed fund unit price is typically disclosed as an entry or exit price. The buy/sell spread is the difference between the two figures.
The buy/sell spread may vary depending on the flow of money into or out of a fund on a given day.
For example, if a fund has a net 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 estimated buy/sell spread should be disclosed in the Product Disclosure Statement of the fund. Estimates of 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 0.3% for property. So if the average buy/sell spread of your portfolio is 0.18% and you are switching $500,000 of investments, then the cost will be $900.
Some managed fund products may charge a unit switching fee, these costs can be up to 1%. Your adviser may be referring to this fee as 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 adviser.
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 adviser may have very good reasons why they wish you to rebalance your portfolio;
- They may wish to rebalance your portfolio to reduce risk or re-orientate 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.
Q&A with The Coach story first appeared on the WealthParners www.wealthpartners.net.au.
Any general advice in this story doesn't take account of your personal objectives, financial situation and needs.