The Coach: Why are my super fund costs rising?

The Coach answers questions about superannuation costs rising and bid and offer price differences.

If being at the front of the queue matters, priority is always given to those who “bid” the highest or “ask” the lowest.

I have received a notification from my superannuation fund that the “buy/sell” costs on my fund are rising. What are these costs and why have they changed?

When you invest or divest money in a managed fund, the fund manager may incur transaction costs such as broking, stamp duty, taxes to buy or sell the underlying assets in the managed fund portfolio. The fund levies these costs to the investor who is entering or exiting the fund. The cost of the transaction is referred to as a “buy/sell” cost or spread or “transaction cost allowance”.

Existing investors in the fund are not levied these costs as it would be unfair to penalise members of a fund who are not generating the transaction costs. The buy/sell spread may vary depending on the flow of money into or out of a fund on a given day.

Estimates of buy/sell spreads will vary depending on the type of assets being bought and sold and the complexity of the underlying portfolio. Buy/sell spreads in normal market trading conditions will typically vary from between 0.05 per cent for assets such as fixed interest up to around 0.3 per cent for property. So if the average buy/sell spread of your portfolio is 0.18 per cent and you are switching $500,000 of investments, then the cost will be $900. However as a result of recent volatility and substantially higher volumes of switching, some buy/sell spreads have risen dramatically. In some cases up to 16 times!

The transaction cost might also vary depending on whether you are buying or selling an investment. For example if you are investing into a fund, the buy spread cost may be 0.06 per cent however if you are selling out of a fund the sell spread may be 0.4 per cent, or seven times higher.

The transaction cost of making an investment switch will need to be taken into consideration in making your decision whether to switch or not.

We have just been through an exceptional few months on the sharemarket: as volatility and the volume of switches subsides, the buy/sell spreads should revert to previous levels.

Could you explain to me why there is such a large difference between the bid and offer price of shares at the beginning and end of a trading day?

At the beginning and end of every trading day, there is usually a significant disparity in the prices being offered by buyers and sellers of shares. The prices are typically much greater or lower than the indicative opening or closing price shown on your screen. However, when the opening or closing trades go through, many of those orders have been filled and a significant volume of shares might have traded.

A “bid” is the price that a buyer offers when they want to purchase shares. The “offer” or “ask” price, is the price that a seller is willing to sell their shares. During trading hours, bids and offers will typically meet and result in the share trade being executed.

While buyers and sellers are able execute trades immediately at the prevailing market price when the ASX is open, there are two important periods where auctions dictate the price that buyers and sellers will receive when a trade is executed. One is the first 10 minutes of the trading session and the other is the final 10 minutes of the trading day. An auction can also occur under a third scenario if a company resumes trading after a trading halt.

If being at the front of the queue matters, priority is always given to those who “bid” the highest or “ask” the lowest. Even if you have an order first in the queue at a particular price, you could miss out on a trade because someone else who was prepared to bid a higher price or offer a lower price, despite the match price being the price you nominated.

Andrew Heaven is an AMP financial planner at WealthPartners Financial Solutions.

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