AFM wants to work with the sector on more insight into costs of investing

It is difficult for investors to obtain clear and simple insight into the total costs of investment services. This conclusion was demonstrated in a research carried out by The Netherlands Authority for the Financial Markets (AFM).

Costs have a significant effect on the net return that the investor realises with investments. It is therefore additionally important that investors are able to evaluate and compare the total costs of investments. The AFM is calling on the market to provide more insight into the total costs by introducing a so-called total cost of ownership (TCO). As a follow-up to the research, the AFM has therefore presented the market with a discussion paper on this subject. Parties can respond to this paper by 18 January 2013.

What is a TCO?

A TCO is a measure of costs that shows the total costs of investment, and that must be used by the entire market to perform the calculations in the same manner. Prior to the provision of services, an ‘expected TCO’ provides investors with an estimate of the amount of the costs that they can expect over a specific period, e.g. a year. During the provision of services, a ‘realised TCO’ shows the actual costs incurred, which include both direct and indirect costs. Indirect costs are, for example, costs incurred by mutual funds in which investments are made. Direct costs are the costs for the services provided. A TCO is therefore not the same as an all-in fee, because an all-in fee shows only the direct costs.

The AFM believes that transparency concerning the costs prior to the provision of services will clarify, for investors, the specific costs that they will be charged, either directly or indirectly. This places demands on the clarity and completeness of the information concerning the costs. It is also important that investors get insight into what their total costs of investment are. This goes further than transparency. Not only must investors know which types of costs they must take into account, but they must also be able, through the information provided, to form a picture of what they pay –bottom line – for investing their capital.

Costs have a major effect on the net return, and are therefore important for every investor. This certainly applies for the long-term investor. If the annual costs for the investor were to be reduced from 2.5% to 2.0% of the invested capital, for example, this cost reduction would provide the investor with approximately €7,500 more return after a period of 10 years investing with an initial investment of €100,000 and a gross annual return of 6.25%. After 20 years of investing, the same cost reduction would provide an extra €22,000. The longer the investment horizon of the investor, the greater the effect of a cost reduction. Obviously, in addition to costs, other things are also important for investors, such as the quality of the services, the risk management, and the gross return.

Research Findings

The AFM has conducted a research at fifteen investment firms into the transparency concerning the costs, and the amount of costs for the target group in investment services. The research focused on brokers, investment advisers and asset managers. The clarity and completeness of the public information concerning the costs can be significantly improved in many cases. Investment firms often provide little explanation about the costs that will be charged to the investor. For instance, the costs associated with investing in mutual funds are often not mentioned, although investors invest in mutual funds quite often, and these costs comprise often a large proportion of the total costs. In cases where investors invest only in mutual funds the calculated amount of the fund costs represents often more than 75% of the total costs. It was also not always clear for which investors the investment services are actually intended or not intended, which has resulted in the fact that investors are closely examining services that are not advantageous or profitable for them.

The amounts of the costs are often difficult to compare against each other. This is because, among other things, the price structures vary greatly from each other, and in some cases a highly differentiated price structure means that the calculation of (an estimate of) the amount of the costs is very difficult. In some cases it remained unclear as to whether the costs for the investor are in proportion to the costs incurred and efforts made by the investment firm.

The amount of the costs also varies widely between the different types of services. The costs of execution only services are substantially lower than the costs of investment advice and asset management services. This is a logical consequence of the type of service: in the case of investment advice, the investor receives advice on the investment decisions to be made, and in the case of asset management, an asset manager takes the investment decisions on behalf of the investor. With execution only services this is not the case, so that the services can be offered at a less expensive rate. With respect to investment advice and asset management, the costs are therefore indeed higher, but in return, a more extensive form of service is provided. In a number of cases, a portion of the target group appeared to have high costs when compared to the expected return. This creates the risk that the return, after deduction of costs, will not outweigh the risk.


The findings and recommendations that emerged from this research are included in the report ‘Research into the costs of investment services’. The recommendations in the report are directed at investment firms, and are partly legal obligations and partly advice from the AFM to assist investment firms to focus on the client's interests.

The investment firms involved in this research have already implemented adjustments and have stated that they will make even more adjustments. The AFM welcomes these steps. The AFM expects all investment firms to evaluate their services on the basis of the recommendations in the report, and to adjust their services if desirable. Both the information provided to investors who are considering whether to start investing and the information provided to investors who are already doing so can be improved in many cases.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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