For a firm that prides itself in being transparent, we have been slow in clarifying our message on fees. There are two questions that come up often, that we can address more clearly.
Before I do that, however, I should provide some background information for readers less familiar with Steadyhand. Each of our funds charges ‘One Simple Fee’ (our brilliant and innovative name) which is a fixed fee that includes the cost of our services as manager and all of the fund's operating expenses. It is the equivalent of a ‘Management Expense Ratio’ or MER, although we have fixed the level so it won’t change from year to year like some MERs do.
The first question that arises is: “Given that you enlist outside experts to manage your funds, do I also pay a second fee for their services?”
The answer is no. The revenue we generate from the ‘One Simple Fee’ goes to covering all the costs of running the funds, including paying the managers, auditors, regulators, lawyers, custodian, record-keeper and tax department (GST).
The second question requires a longer explanation. “Does the fee cover trading commissions when the manager buys and sells stocks?” Again, the answer is no. The fund pays the commissions, so it is an additional cost over and above the MER. This is standard practice in the industry.
But in reality, trading commissions are not a significant cost to our funds due to the fact that (1) commission rates are very low for professional investors (2-5 cents per share), (2) our managers are not active traders and (3) they are not managing large asset bases relative to the industry.
The latter point is important because the big cost of trading is the market impact of buying or selling, not the commission charge. For example, if the fund manager goes into the market to buy a stock, they have to pay a certain price to get their order filled. If it is a small order, the price may be in line with where the stock is trading at the time. But if the order is for a few millions shares, they may have to bid up the stock to find enough supply. Paying up may mean a few cents or a few dollars per share depending on the stock price, order size, trading volume and urgency of the manager.
For a large manager, commission costs may be lower due to their bargaining power, but the total cost of the transaction, which is what investors care about, is going to be higher.
So to summarize:
- Our ‘One Simple Fee’ covers the costs of running the Steadyhand funds, including the fee charged by the portfolio manager.
- Trading commissions are paid by the fund, however, and are not covered by the ‘One Simple Fee’
- There are no other charges or fees involved in being a Steadyhand client – i.e. purchase, redemption, switch or administrative fees.
Despite being exposed as a less-than-clear communicator, I’m delighted that people are asking these types of questions. Keeping the cost of investing down is critically important.