With all purchases, we are aware of the associated costs. -When you grab something in the supermarket, you see its price. There’s a price list at the hairdresser’s. And when you close a mobile phone contract, you will have most likely informed yourself about different tariffs. It’s more complex with assets: Many investors are surprised when funds don’t accumulate as planned due to charges and fees that weren’t clearly advertised. In extreme cases, over a third of the investment goes to the mediator.
Prospective investors should thus be aware and choose the right asset type - because this is where there are fundamental differences when it comes to costs. Equity funds incur higher costs than online crowdinvesting platforms such as www.exporo.com. But let’s first have a look at the different types of charges.
With investment funds there are direct charges, which the investor has to pay directly and there are also indirect charges which have an affect on the value growth of the fund.
These are the direct charges:
The premium is a charge that will be applied to the purchase of funds. Investment companies charge the premium as a type of compensation for any costs incurred by the sale and consultation. It is thus a type of sales commission. The premium is is calculated as a percentage of the redemption price. Let’s say the redemption price for a funds share is € 100 and the premium is 5 %, the investor will need to pay € 105 although he only invests € 100. The amount of the charge varies greatly depending on the different asset types. Equity funds and mixed funds incur 4 - 6 %, while pension funds incur 2 - 4 %, money market funds 0.5 %, open real estate funds 5 % and investments on online crowdfunding platforms incur none.
The custodian bank will generally charge fees for their safekeeping services. This fee is generally below 1 %. With an investment of € 10.000 a bank may charge € 50 with a custodial fee of 0.5 %.
One rare occasions a redemption fee will be due when an investor returns his fund shares to the funds company. This fee can total 2 - 4 % of the investment amount. Indirect charges will only affect the investor indirectly, but will have an effect on the fund assets. These are costs that the investment company incurs and will deduct from the fund assets. This will reduce the individual fund share of the investor. Most indirect charges will be listed as an index number known as the Total Expense Ratio (TER) or the Total Cost Ratio (TCR). The TER is a percentage of the average fund volume. The TER also depends on the type of asset. According to the BVI: the association for investment fund management companies and investment funds, the average TER for equity funds is 1.6 %, for pension funds it is 0.9 %, for open real estate funds it is 0.7 % and for money market funds it is 0.5 %. Once again, online crowdfunding for real estate investments outshines all the other investment forms with a TER of 0 %.
The TER mainly includes the following costs:
The management fee covers the management of the investment fund - especially the work of the fund manager. Some fund types such as index funds entail a smaller management fee, because the funds manager doesn’t actively manage the investment of the objects. A fee of 0 % - 2 % will be deducted monthly or annually from the fund assets. With an investment amount of € 10,000 and an annual management fee of 1.5 %, 150 € will be deducted from the total investment sum. This leaves the fund assets with a remaining € 9,850.
Custodian Bank charges of the investment company
Similar to custodian banks that charge a fee for providing services to investors, the fund company also requires a custodian bank that manages the fund assets. Needless to say, the bank will not manage these funds free of charge. So, there will be costs that will affect the asset funds.
In addition to the management and the custodial fee, there are further costs which are not included in the TER. Transaction costs as well as additional performance fees are some to mention a few. Transaction costs occur when securities are bought or sold in equity funds or when there are agent fees for real estate in real estate funds. These charges are transferred to the investors and decrease the return even more when there are frequent transactions. The performance fees are due when the managers increase the funds by a specific amount compared to an index such as the DAX within a specific time frame. The performance fees are often double digit and can decrease the return significantly. In the past, there were even reports of cases in which performance fees were charged despite a decrease of the funds. Investors should thus study the relevant terms and conditions in advance.
Intransparency and smaller returns
Even for experienced investors, the complex charges oftentimes seem like a jungle of opacity. Questions in regards to charges cannot be easily answered because fund companies do not make the relevant information transparent. In addition, no clear values are provided or are only hidden in complicated calculation examples in the fund prospectus. Another problem is the significantly reduced return due to charges and fees. Each and every one of these charges reduces the return and has thus a negative impact for investors. This explains the huge influx crowdinvesting platforms are currently witnessing.
Increasing interest in online crowdfunding
No hidden charges, no clauses in small print and no complicated sample calculations: With online crowdfunding for investments you know what you are getting and more and more investors appreciate this. Especially with exporo.de, because investors are neither charged for their investment, nor for the registration or use of the platform. The full sum is invested in the specific project and will earn interest accordingly.
|Investment sum||Premium||Net investment||Interest p.a.||Account balance - year 1||Total Expense Ratio||After TER|
|Exporo (without compound interest)||10.000||0%||10.000||5,5%||10.550,00||0%||10.550,00|
|Open-ended real estate funds||10.000||5%||9.500||2,8%||9.766,00||0,70%||9.697,64|
|Equity funds in Germany||10.000||5%||9.500||7,6%||10.222,00||1,60%||10.058,45|
Comparative example of investment costs between Exporo.de and other investment types. Source: Handelsblatt