25th June 2018
Nobody likes to be suffering from something that they aren’t aware of, particularly if it is a nasty and invasive something that has a long term impact on their well-being, & that could do so in a pretty significant way…….so this week we are going to explore and try to diagnose if anyone here is suffering from a nasty dose of Bid-Offer Spread on their investment or pension planning.
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What Is Bid-Offer Spread?
We were recently featured in The Sunday Times in an article about the latest EU Regulation that forces investment companies to disclose all charges to new investors. Our view is that disclosure and transparency are totally overdue, and vital! This blog is not some tirade about fees of investing, it is merely pointing out a fact, a condition that many may be suffering but unfortunately have no awareness of. Robin S. Sharma apparently stated that ‘Awareness precedes choice, and choice precedes results’. I am gunning for you to achieve the results you want, & so very hopeful that awareness about Bid-Offer will impact positively on your results.
Let’s say you wanted to buy a single share of ABBEY (the company sitting at the top of the ISEQ- based on alphabetical order!) you would today pay €15.90 for it. Likewise if you wanted to sell a share of ABBEY today you would get €15.90 for it. There is no difference between the ‘Bid’ price and the ‘Offer’ price. The price is the price! Yes there would likely be separate/additional buying or selling costs involved depending on who and how you bought or sold the share, but the price is the price, there is generally no murky stuff going on with the pricing.
The same cannot be said for all forms of investing or saving however. Based on our experience many many (the majority – no stats unfortunately!!) of investors and pension savers in Ireland are paying some form of Bid-Offer Spread, a nasty dose that is having a rather significant impact on their results with regards their investments. many of these retail or pension investors, if they wanted to buy (say) 1 unit in an investment/pension fund, would pay for example €15.90 for the unit today, however if they wanted to sell it today they would get only €15.10 for that same unit. There is a difference (a spread) between the ‘bid’ price and the ‘offer’ prices. Hence the term Bid-Offer spread. The difference may not seem like a big deal, however the investor is getting back only 95% of the purchase price, for no apparent reason, and will no realisation that it is happening in the background! Bid-Offer spread can range, we have seen everything from 1% to 25%, which is really really scary and in our view borderline criminal.
Up The Ante….
Buying a unit for €15.90 and selling it at a later date for €15.10 may indeed seem like a small concern however if we turn up the volumes then we can see it’s true impact. Imagine you are saving into a pension fund (which are not obliged under the new regulations to disclose all fees BTW!). You started 10 years ago, saving €500 per month. You are paying 1.5% annual management fee (which in reality is likely much higher!), likely an allocation/entry fee, and a policy fee or two. Lets focus however on the Bid-Offer aspect here! You paid in approximately €60,000 so far and you have managed to see some growth on the fund, so it’s total value sits now at €80,000. You are encouraged by it, and in the interest of giving yourself some form of income in retirement you continue to invest for the next 25 years, until retirement age of 66. Over that time, as your salary increases you increase your savings, to an average of €650 per month for the 25 years. In total you have paid in €275,000 to your pension pot, and have achieved very decent growth over that term, despite the annual management charge.
Taking the growth out for simplicity’s sake the impact of the Bid-Offer Spread of 5% on your plan is that essentially your €275,000 will equate €261,250 when you go to ‘cash it in’ and draw your pension. That is a €14,000 haircut to your pension pot that has largely occurred without you even being aware of it, and moreso without you having been made aware of it by your provider. Taking into account the growth then the gap would be much larger, depending on the growth rates you achieve. Sure, you may have received a statement that may or may not have made some reference to a ‘bid’ or ‘offer’ price however there was probably no mention of the fact that you would feel the effect of these words in hard cash!?
An Invisible Illness?
As mentioned above there are typically several types of charges involved in an investment or pension. What is particularly tricky about the Bid-Offer spread is that it is so difficult to actually track it’s impact on your fund. While there is an onus on a provider to disclose any likely Bid-Offer spread in the initial documents of an investment there is not the same onus when it comes to pension funds, so it can be a little more difficult to track it. In our own research of the main fund providers here in Ireland there are several that are particularly fond of having high Bid-Offer spreads, which can obviously have a dramatic impact on the realisable values that investors achieve. To put this in context imagine you lodged €100,000 into a bank account and then a few years later when you go to withdraw your €100,000 you are told that all you are getting back is €95,000, because of the bid-offer spread, you would likely be not very impressed!
If you are someone who would be greatly troubled by the likes of this happening to you then the simplest thing you can do is to find out for yourself if it is something you are suffering or not. If you are an investor or indeed a pension saver then go and find out for yourself if you are suffering from a dose of Bid-Offer Spread or not. If you are you can then explore what choices you have that would benefit you. Awareness precedes choice, and choice precedes results remember! It might just save you a small (or not so small) fortune in the future.
Thanks for reading.
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