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Mifid II Costs and Charges Q&A Legal & General Investment Management January 2019 MiFID II: costs and charges Q&A For Professional Investors MiFID II: costs and charges Q&A The introduction of MiFID II regulations in January 2018 has changed the way costs and charges are presented for funds. At LGIM, we believe our fees have always been competitive and we are mindful that this new regulation has caused widespread confusion amongst investors at all levels. It is clear that one of the issues investors now face is how they compare investment products. Different firms have used different methodologies, making comparisons based on costs impractical. Over time there will be some convergence of methodologies across the industry and we will continue to provide support and clarity directly to platforms and our clients, whilst fulfilling our regulatory obligations. We have produced a Q&A (below) to help address some of the questions you may have but if you require any assistance about costs and charges or assessing the products at LGIM, please contact the Sales Support Team on 0345 070 8684 or email [email protected] WHAT DO THE MIFID II WHAT ARE THE TRANSACTION PRIIPs (Packaged Retail and REGULATIONS MEAN FOR COSTS COSTS? Insurance-based Investment Products) AND CHARGES DISCLOSURE? Transaction costs are the costs regulations, implicit costs are the The regulations have changed the way associated with buying and selling the difference between the mid-market costs and charges are presented for securities within the fund. There are price of an asset at the time the order funds. These changes apply to all two types of transaction costs: explicit is placed in the market (the ”arrival asset management transactions where costs and implicit costs. price”), and the price at which the deal there is a cost of investing money in is struck. The implicit cost can be either the market. WHAT IS AN EXPLICIT COST? positive or negative, and can vary This is a cost charged to and paid greatly depending on the liquidity of the IS THIS A CHANGE TO THE COSTS directly by the fund to purchase and financial instrument. A CLIENT PAYS? sell financial instruments. It includes No, it’s a regulatory change to how broker commission, transaction taxes Firms are obliged to use the arrival costs are calculated and displayed. and exchange fees. price methodology from January 2018. There is no change to the costs a client For transactions prior to that the pays. WHAT IS AN IMPLICIT COST? regulations allow different approaches Implicit costs are not easily observable to estimate the costs. WHAT ARE EX-ANTE COSTS? making them hard to quantify. They These are the expected costs and include transaction costs embedded in associated charges of the fund. the bid-offer spread and the response of the market to a trade or the timing of WHAT ARE EX-POST COSTS? a trade (market impact, opportunity These are the actual costs incurred in cost, delay costs). the fund. Ex-post costs will be provided from February 2019 for costs incurred In the methodology set out in the in 2018. January 2019 MiFID II: costs and charges Q&A WHAT IS INCLUDED IN THE The Closing Price is the final price price”) and the eventual execution TRANSACTION COSTS FIGURE? calculated on the trading day before price of the trade. Brokerage commissions the decision to trade is made. The closing price is used if neither the It is possible for the slippage cost to be Transaction taxes and stamp duty arrival price nor the opening price are negative; for example when buying an available. asset the arrival price might be higher Exchange fees than the actual price paid. Implicit costs The final methodology is to use a Fixed Fee Table where the transaction Another reason transaction costs might Clearing charges costs for each asset class are be negative is if the anti-dilution offset, the spread collected by the fund when Anti-dilution offset calculated by multiplying half of the estimated spread by the portfolio people buy or sell so that the existing Indirect transaction costs (costs turnover. fund holders do not suffer their incurred by any funds held) transaction costs, is higher than the WHAT METHODOLOGY ARE YOU actual costs incurred. This might WHAT IS AN ANTI-DILUTION USING TO CALCULATE happen, for example, if the fund OFFSET? TRANSACTION COSTS? manager is able to invest the inflow in Funds typically have a pricing For funds with over one year of history new issues which do not incur any mechanism that offsets the impact of we are using arrival prices for equities, transaction costs or cross trades at transactions caused by cash flow into bonds and FX. The closing price mid. or out of the fund to the existing methodology is used for OTC investors such as a fund spread. The derivatives while the fixed fee table is It might be counter-intuitive to show amount of benefit to the on-going used for exchange traded derivatives. negative transaction costs, but the holders of the fund collected through For funds with under one year of rules and guidance are clear that this is such anti-dilution mechanisms is used history we are using the fixed fee table. the methodology that must be followed. to offset the transaction costs incurred. WILL THE CLIENT PAY THE WHY ARE THE TRANSACTION WHAT ARE THE DIFFERENT TRANSACTION COSTS? COSTS FOR THE UK PROPERTY METHODOLOGIES FOR Transaction costs are not paid directly FUND SHOWING AS NEGATIVE? CALCULATING TRANSACTION The transaction costs for the UK COSTS? by the client but have always been charged to the fund, and effectively Property Fund are showing as negative Different firms will use different reduce the returns achieved by the due to the fact that the fund has methodologies for periods prior to the fund. Under the new rules we are recently had an influx of new regulations coming into effect. disclosing these costs to improve the investments. The spread paid by these investors when buying units should Fund managers have four options to transparency of the funds, and ensure offset the resulting transaction costs, calculate their costs and charges customers understand what they are however the fund has not yet incurred depending on which price point was paying for. all the costs associated with placing available. WILL THE REGULATIONS that money in the market (i.e. when INTRODUCE ONE METHODOLOGY The Arrival Price is the mid-market further properties are purchased) so TO ALLOW INVESTORS TO price captured at the time the decision currently the transaction costs are COMPARE COSTS AND CHARGES? to trade is made. The difference shown as negative. Yes. For transactions executed from between the arrival price and the price January 2018 all fund managers must WHY IS THE OCF FIGURE QUOTED at which the trade was executed is the use the Arrival Price methodology IN THE EUROPEAN MIFID implicit cost. where possible. TEMPLATE (EMT) DIFFERENT TO THAT QUOTED ON FACTSHEETS The Opening Price is the price WHY DO YOU SHOW A NEGATIVE AND THE WEBSITE? available at the opening of trading on TRANSACTION COST FIGURE? We have to calculate the figures under the day the decision to trade is made. The transaction cost figure includes an different regulations, which are not The opening price is used when the element of implicit cost (“slippage”) exactly aligned. The OCF published on arrival price is not available. which is the difference between the Fund documentation, such as a mid-market price at the time the factsheet, is calculated under the trade is sent to the market (“arrival 2 January 2019 MiFID II: costs and charges Q&A methodology set out in guidance for WHAT COSTS ARE INCLUDED IN Costs in regard to the purchase the UCITS Directive. THE EMT OCF WHICH ARE NOT and sale of real property and on- INCLUDED IN THE OCF QUOTED IN going maintenance costs. The on-going charges figure in the FUND DOCUMENTATION? WHERE CAN I FIND THE COSTS EMT is different because under the Bank overdraft interest AND CHARGES FOR LGIM RETAIL MiFID/ PRIIPs methodology other FUNDS? charges are included such as financing Repo interest paid The costs and charges are included in costs (bank interest charges, repo Income from security lending our EMT which can be found on our interest paid) and property costs retained by the firm Adviser Site along with some guidance (maintenance and repair fees, property on how to view your investment in light management fees, letting costs and Ongoing charges from any funds, of these changes. legal fees related to running REITs, investment trusts held by properties). the fund, or proxies where the actual charges are not available MiFID II: costs and charges – what to consider when assessing the value of your investment While the inclusion of transaction costs will make some funds seem more expensive, they should not be read in isolation. These transaction costs have always been reflected in the fund performance which also needs to be considered. Certain investment strategies will incur higher transaction costs through higher fund turnover which may be generating better performance. MiFID II: costs and charges – how to calculate the full cost of your investment To calculate the overall cost applicable to each fund you will need to add the ongoing cost to the transaction cost. Please note: For funds less than a year, we will assess the most suitable methodology for each fund dependent on what is most consistent with the spread. In some cases we have chosen to use the worst case scenario so as to not overestimate performance. Costs and charges will differ for index and active funds and higher costs can result in better performance so should not be looked at in isolation.
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