Ex-ante costs and charges, detailed calculation logic

If you don’t understand the figures that the ex-ante costs and charges report gives you, this page is for you. Note, that how the figures are calculated, and how they add up, has changed significantly in 12/2019 (report version 1.6 / projected costs API version 3.2). If you are using an older version of the API/report, the “Challenges with the previous cost projection logic” -section may be of interest to you.

Projection parameters

Q: Why is my 1% yearly management fee showing up in the table as 1.03%?

A: The table shows the total amount of costs deducted during the projection, whereas the Effect of costs (EUR) -section shows the difference compared to a scenario where there are no costs. These two things are not the same, because costs lower projected wealth exponentially every year, which in turn also lowers future costs. The first year’s costs leave us with 10 700 at the end of the first year instead of 10 800. The value of the return on this missing 100 is 8 EUR (100 * 1,08), which is the difference between the figures (215 - 207 = 8).

A simpler example which illustrates the same effect is, that the cumulative effect of a 100 EUR subscription fee on investment over many years is actually 100 EUR * (yearly return ^ years), not just 100 EUR.

Projection parameters

Q: Why is my 1% yearly management fee showing up in the table as 1.03%?

A: The calculation is:

What happened is, that the 100 EUR subscription fee is charged at the beginning of the projection, but the management fee is charged later. Therefore the subscription fee’s total effect on projected wealth is actually slightly higher than 0,5%, BUT we decided that it would be very confusing if the absolute figures and percentage figures weren’t comparable. So rather than have 100 EUR = 0.53% and right next to it 207 EUR = 1.00% (!!?), we chose simpler consistency. Note, that this effect only occurs with starting/ending fees (the latter of which isn’t supported at the time of writing).

Q: Where did the total cost value of 1,53% come from?

A: We calculate the projected wealth with and without costs as described in the Simple example and basic formulas-section:

From this information, we calculate the return including costs backwards from the projected wealth (including fees) figure:

The difference between these return percentages is 8% - 6,47% = 1,53%

Q: Why does the table show 307 EUR, but the Effect of costs (EUR) part shows 331,64 EUR?

A: This is answered in the “Simple example and basic formulas” -section. Same reason.

Here’s an example that illustrates portfolio costs, as well as the fact that the length of the projection as well as the expected return may be changed.

Time: 10 years

Expected return: 10 %

Fees: 1% yearly fee on the security (ongoing charges, financial instruments), and 1% yearly portfolio fee (ongoing charges, Investment services)

Initial investment: 10 000 EUR

Kickbacks, rebates, or third-party payments all refer to the same thing: compensation which is paid to an asset manager (or similar) to incentivize them to invest in specific investment products. E.g. a fund company may have an agreement to pay a certain portion of the fees that they collect to a specific asset manager who invests in the fund company’s funds. In this section, we will refer to such payments as kickbacks. They show up in the report with the name third-party payments.

Whether or not to include kickback calculation in cost projections is configurable (see the parent page for configuration instructions). If configured, kickbacks are calculated based on:

Kickbacks can show up in the report in two ways, depending on whether or not they are distributed back to clients:

Note that the kickback percentages and distribution percentages do not apply to fees that are recorded directly on transactions. If you are projecting costs based on a specific transaction (or transactions), and want to record third-party payments, you should record those directly (in practice by setting up a transaction cost type “Undistributed third-party payments”, categorized into category 3rd (and most likely one-off).

This example is exactly the same as the first basic example, except for kickbacks: we added a 30% kickback, which is fully distributed back to investors. The result is, that the security’s ongoing costs are reduced by 30% to 0,70% per year which is visible in the chart and totals figures as well. Third party payments are 0, because the asset manager (or similar) isn’t keeping any of the kickbacks.

Note that the report handles kickbacks which are re-distributed back to clients as discounts on the fees. If the cash is in reality credited to the investors' account, then this model is only accurate if such cash would be re-invested (in the model, the 0,3% per year which the end investor saves because of distributed kickbacks is re-invested for year 2). This is a fine assumption, because many investments pay dividends or generate other kinds of cashflows, which are also assumed to be reinvested.

The only difference here, compared to the previous example, is that we distribute only 50% of the kickbacks back to the client; the asset manager keeps the other 50% for themself. The full kickback is reduced from security costs, but half of it (which is kept by the asset manager) shows up in the Third party payments -row. Note, that third party payments always show up in the Investment services -columns and the totals. As you might expect, the total yearly costs are now 0.85%.