New EU rules improve transparency of fees and costs
Low fees are important for successful savings. That's why we at Lysa are happy to see a new EU legislation that makes it mandatory for all funds to report their fees and costs in a more clear and transparent way. This is good for you, it's good for us, and it's good for the financial industry.
As of January 1, 2023, the PRIIP regulation (PRIIP is short for “Packaged Retail Investment Insurance-based Products”.), a new EU regulatory framework, came into effect. This framework governs how funds should report fees and costs. Among other things, it introduces a broader definition of the term "costs", requiring funds to report a wider variety of costs than before. Consequently, European funds will report higher total fees and costs. This change doesn't mean that you, as a customer, pay more than before; it means that items previously not considered as costs will be covered by the new definition and thus included in the funds’ cost reporting.
We believe the new rules enhance clarity and transparency in funds' cost reporting. For us at Lysa, the changes result in slightly higher reported transaction costs, 0.06% for our equity fund and 0.13% for our bond fund.
We have produced a FAQ related to the new regulatory framework for those who are interested in learning more. We have chosen to focus on the rules related to reporting of transaction costs and its impact on the total fee since this is what will affect our customers. As always, feel free to contact our customer service if you have any questions.
FAQ about transaction costs:
Why has Lysa changed its way of presenting transaction costs?
The funds that Lysa invests in now present their transaction costs in a new and more detailed way. This change is due to a new EU regulatory framework (the PRIIP regulation) which requires all funds to report their transaction costs in a uniform manner in a fact sheet called PRIIP KID.
Previously, Lysa only had access to data on transaction costs in Lysa's funds, which we published. Through the PRIIP regulation, there is a requirement for all funds to report transaction costs in a uniform and more detailed way. This means that we also get access to information about transaction costs from the funds that Lysa's funds invest in, and we can thus present it in a more clear way.
It is positive that higher requirements are imposed on funds' cost reporting through the PRIIP regulation as it means that we can present costs in a more comprehensive way and also deepen our analysis of the cost-effectiveness of underlying funds.
What is a transaction cost and how does it affect my savings?
Transaction costs are a cost incurred when buying or selling a financial instrument (such as a stock, an ETF, a bond, or a currency). When you invest your money in funds through Lysa, there are no purchase or sales fees. However, the funds you invest in pay transaction costs when they buy or sell underlying instruments, for example, stocks, ETFs, bonds, or currencies
A transaction cost affects your savings by lowering the expected future return. It is therefore important that transaction costs are as low as possible.
The changes in how costs are reported do not mean that you as a customer pay more than before; it means that items previously not considered as costs will be covered by the new definition and thus included in the funds’ cost reporting in a more uniform and transparent way by all funds.
Lysa's fee has not changed. Lysa charges for its services through a management fee for Lysa's portfolio and fund management. Transaction costs do not benefit Lysa in any way. You can see exactly what the transaction costs are for your savings by logging in to Lysa’s webpage. There you will find both historical costs and estimated future costs for your particular investment.
What is the difference between a direct transaction cost and an indirect transaction cost?
There are two types of transaction costs: direct transaction costs and indirect transaction costs. A direct transaction cost is clear and relatively easy to determine because typically there is a record that details precisely what has been paid. Examples of direct transaction costs include brokerage fees, commissions, or other charges paid in connection with a transaction. For Lysa's funds, direct costs mainly consist of brokerage fees charged by an intermediary to execute a transaction.
On the other hand, an indirect transaction cost is not as apparent but still affects the return on investment. Examples of indirect transaction costs include spread costs (the difference between the buying and selling prices of a financial instrument), market impact (the cost of executing a large transaction that can affect the market price of the asset), and potential losses due to delays in the transaction.
When a fund purchases an asset, it often pays a slightly higher price than when it sells the same asset, and this difference is called "the spread cost". A "spread" occurs, for example, when a seller is willing to sell a financial instrument for 100 €, and a buyer wants to buy it for 98 €. In this case, the spread is 2 € or 2%. To immediately purchase the financial instrument, the buyer pays 100 € or tries to make a deal at, for example, 99 €. In the latter case, the spread is smaller (1 € or 1%). The buyer has not "paid" any transaction cost (i.e. no direct transaction cost arises), but gets a higher return in the latter case as the price is better.
These indirect transaction costs are not as clear and require the fund company to estimate them based on all transactions made. The PRIIPs regulation provides a guide on how to estimate them, but the process can vary from fund to fund.
How large are the transaction costs for Lysa's funds?
For Lysa's equity fund, transaction costs are 0.06%. For Lysa's bond fund, transaction costs are 0.13%. We estimate that about 90% of transaction costs are indirect costs, and about 10% are direct costs.
Indirect transaction costs for the funds Lysa invests in are mainly related to spread costs. The spread varies depending on the asset's liquidity, i.e. how easy it is to buy or sell it without affecting the price. Generally, the spread is lower for more liquid assets because they are easier to trade. Therefore, indirect costs are generally higher for funds investing in small companies, emerging markets, or corporate bonds.
Lysa has previously talked about never paying more than 0.4% in fees. Is this still true?
Not paying more than 0.4% in fees is a good rule of thumb when discussing fees paid in management fees and direct transaction costs paid to brokers when a fund buys or sells assets. When including indirect transaction costs, it may be reasonable for the total cost to be slightly higher when maintaining a diversified portfolio. This is related to some markets and types of securities being associated with higher indirect transaction costs. For example, corporate bonds generally have a higher spread. This means that for our bond funds, the total fee exceeds 0.4%.
For Lysa's fund investing in equities, transaction costs (both direct and indirect) are 0.06%, and for Lysa's bond fund, they are 0.13% (see table below).
|Underlying fund fee||Transaction costs||Costs excluding Lysa's fee||Lysa's maximum fee||Total maximum fee|
|Lysa Aktier||0,09 %||0,06 %||0,15 %||0,24 %||0,39 %|
|Lysa Global Fixed Income||0,09 %||0,13 %||0,21 %||0,24 %||0,45 %|
Note: Fees and costs as of April 2023.
Is it beneficial that funds now report indirect transaction costs - especially spread costs?
It is beneficial to have increased transparency with the disclosure of indirect transaction costs as part of the overall transaction costs, as it highlights a cost that negatively impacts returns. However, there is potential for improvement, and we hope that future regulations will mandate funds to report direct and indirect transaction costs separately rather than as a combined total expense.
The reason being, a direct transaction cost is explicit, and there is a record that details precisely what has been paid. On the other hand, a spread cost is not as evident, as it requires estimation, which may not be as accurate and can result in varying estimations by different fund companies. Combining an exact cost with an estimated one and only displaying the total can be somewhat confusing.