Annual Charges Under MIFID II

I recently received a statement of the overall charges incurred on one of my SIPPs during 2018. This is a requirement of MIFID II so I guess I’ll be getting similar statements from other brokers I use soon.

The statement itemises all the charges paid, including one-off charges (which were zero), annual on-going charges paid on investment trust holdings and transaction charges on dealing (excluding stamp duty taxes). With a mixture of direct holdings and investment trust holdings, and a reasonably active trading style, the overall charges came to 0.36% of the portfolio.

That seems reasonable to me. How does it compare to the charges imposed by investment trusts or funds? It’s not easy to compare directly because although investment trusts and funds report an “On-going charge”, that actually excludes their dealing costs at present. But for example, the On-going Charge for one of the larger generalist investment trusts (City of London) is given as 0.41% with no performance fee. So their charges are undoubtedly higher than doing it yourself and managing your own low-cost SIPP or ISA fund (my SIPP is not in drawdown when other charges would likely be incurred such as for reviews).

But of course the additional work of managing your own portfolio may not be justified if fund charges are as low as 0.41% even with dealing costs added. Time is one of the few things most people don’t have in the modern world so they generally value it highly. So long as you can trust the fund manager and are happy with their performance, why bother with doing it yourself? But in practice many small cap or specialist funds will charge more than 1.0% and they may also impose performance fees which increases the overall cost even further.

I probably don’t need to remind readers that the impact in the long-term of an additional 1% of charges is very damaging. On a $100,000 portfolio it could reduce the return by $30,000 over 20 years. See this note published by the SEC for the details: https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf . Charges are important so this new information being produced as a result of MIFID may be helpful to some investors even if it costs a lot to produce and is not entirely accurate in my case – I think some rounding is taking place.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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