Adding up all the fees, commissions and expenses to administer your wealth is known as the Total Cost of Exposure Ratio (TCER).
To make the decision as to what to invest in, it either costs time or you pay someone else to do it for you. Then, there are the transaction costs, which includes commission for the execution of an order, and possibly exchange fees, stamp duty, or other administrative fees. There are also custody fees, regulatory fees, and reporting fees. You will also have to account for any profits and losses as part of your tax reporting obligations, for which you may wish to use an accountant or a lawyer for structuring purposes. Depending on your investment, there can also be further consultant, administrative, management and performance fees. In short, anything that plays a part in the process of moving one asset into another, involves an endless list of direct and indirect costs and fees. Only when one accounts for all of them, can one truly understand the total cost of exposure and the true risk and reward ratio that is so important when considering an investment.
When we started analysing our total cost of exposure for our family office, we were amazed at the amount of detail we had to gather to understand our true position. It took months to even make our service providers understand the level of transparency required. Many of their systems were not in a position to give us the information, either because it wasn’t produced or the system had been going through yet another integration exercise as software systems are updated to meet new business and/or technological standards. Some numbers we also had to interpolate. Particularly, anything to do with foreign exchange was very difficult to unwind as the fees and costs are often bundled as part of other services. Once you put the numbers into perspective and relative to one another, it is abundantly clear where the value-added parts of the chain are.
Making an investment is risky enough and you don’t want to spend 2% more to extract an extra 1% from an investment. Particularly on a year to year basis, these fees compound and add up (see Exhibit 1). Knowing your TCER will help you make sure of that.
Exhibit 1