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NOVEMBER 5, 2015

MiFID II and Consumer Cost Reporting in European Wealth Management Market

By Objectway

Reading time: 2 min


What’s the impact of the introduction of MiFID II and MiFIR on consumer cost reporting in the European wealth management market? Are you already compliant? Upcoming regulations require direct and indirect costs in consumer reporting. The Total Cost of Ownership principle aims for clear cost reporting and covers both regulatory and consumer requirements for cost transparency.

Total Cost of Ownership

The Total Cost of Ownership, or TCO, is a relatively new concept in the world of fund investments and wealth management. The cost impact is an important factor in making the correct investment decisions and determining their expected returns.

Ratios are an investment manager’s playground and can be used to express a multitude of effects and behaviours in a portfolio. However, most financial and economic ratios are not very intuitive or well known to consumers. The fact remains that ratios are the best way to express certain evolutions and behaviours in a portfolio, as well as the composition of costs for that portfolio.

Cost Ratios

The costs in a portfolio can be divided into several cost ratios, with each ratio having a different goal and explanatory purpose. The main cost ratios used in the Total Cost of Ownership principle split up the total set of costs into distinct types. The most used cost ratios for expressing the Total Cost of Ownership are:

  • Direct cost ratio, which describes the relative share of the direct costs (excluding taxes) in the total portfolio value.
  • Taxes ratio, which gives an indication of the relative share of all due taxes against the total portfolio value.
  • Indirect cost ratio, which expresses the relative share of the all indirect costs out of mutual fund positions against the total portfolio value.

The ratios can be combined to provide an insight on the direct, indirect and total costs in the portfolio.

Total Cost Ratios

The Total Cost Ratio expresses the combination of all direct and indirect costs of a portfolio. This ratio combines the Direct Cost and Indirect Cost Ratios so that the full set of portfolio costs and taxes is included. Since both the direct costs and the ongoing charges are included in this ratio, it can be assumed that this ratio reflects the Total Cost of Ownership of the portfolio.