Cost analysis in Deep Alpha
Deep Alpha's "cost analysis" primarily aims to provide a detailed description of the estimated costs for a savings plan. It also illustrates the effect of these costs. The purpose is to offer investors a transparent and insightful overview of the expected costs and their impact on returns. The intent of this page is to give an understanding of how the module can be used, as well as explain the significance of the various figures displayed. The document is divided into two main parts:
- A user manual that guides where and how to find the analysis, as well as the available navigation options and a detailed description of each element in the selected analysis component.
- General information about calculations and assumptions made.
The cost analysis is available on the proposal page in the advisory flow. This represents the final step in the process, aiming to provide insight into the chosen investment objectives discussed with the investor. On the left side of the proposal page, you will see a vertical menu listing various analysis components. To display the cost analysis, click on "costs". See the illustration below for a visual guide:
The cost analysis consists of various elements covered in the upcoming sections:
- Cost Summary
- Year 1
- Year 10
- Fund Details Amount
- Details – Fund %
Each element contains calculations designed to assist the advisor in providing insight to the investor about costs and the effect of costs.
A key element in the cost analysis is the graph. It displays a expected development of the following elements:
- Expected value before costs
- Expected value after costs
The blue column represents the expected value after costs. The top of the column indicates the expected value before costs, while the green part of the column illustrates the effect of the costs. As shown in the illustration below, the graph is interactive. By hovering the mouse pointer over the columns, you receive detailed information for each year
- Expected Value Before Costs: This figure represents the calculated value of a savings plan based on the selected funds and deposit amount, but without taking costs into account.
- Expected Value After Costs: This value shows the calculated value of a savings plan after costs have been deducted. It provides a realistic picture of what the investor can actually expect in returns after all costs are paid.
- Deposits: This figure indicates the total deposit at the end of the selected year. If monthly saving is not utilized, the deposit amount will remain unchanged and corresponds to the original deposit amount.
The Cost Summary provides an overview of all relevant costs associated with the proposed savings plan. These costs can be divided into several categories and include the following cost elements:
- Fund Management Fee: These are ongoing costs related to the management of the fund.
- Platform Fee: Costs associated with the mediation of the savings plan or service.
- Fund Return Commission Paid to Advisor: Commission returned to the customer
- Fund Transaction Cost: Transaction costs in the fund
- Total Portfolio Costs: This figure represents the sum of all costs and fees associated with the savings plan.
- Custody Fee: This is a fee charged for the safekeeping and maintenance of securities in an investment portfolio. It typically covers administrative services such as account statements, transaction settlements, and record keeping. The custody fee is an essential part of the total costs and contributes to ensuring the secure management of the investor's assets.
To give investors a clear understanding of how the total portfolio costs are calculated, a column marked with the symbols +/-/= has been added. This illustrates that the total portfolio costs are a collective calculation based on the aforementioned cost elements. In addition to these, there is also a separate table that highlights Return Commission to the Bank. These are commissions received by the bank and are used only for the information provided; they do not affect the total costs. The interface will adapt to your cost model. Read more about the cost model flexibility here: Cost Model The image below illustrates the cost summary with its various components:
"Year 1" and "Year 10" provide a detailed breakdown of the costs and their effects over a period of respectively 1 and 10 years. To view these analyses, click on the marked buttons shown in the illustration below:
The presentation includes two tables:
- Total Cost Effect After 1/10 Years.
- Total Cost Effect Distributed Across Each Cost Element.
This table combines various elements to provide insight into the relationship between costs and what the investor expects to retain. This understanding can be valuable for the investor as it clarifies how costs affect returns. The table consists of the following elements:
- Deposits: This represents the total amount invested by the investor after 1 and 10 years, respectively.
- Expected Value Before Cost: This is the estimated value of the investment after a given period, without considering any costs. It provides a frame of reference for how the investment would have grown without costs.
- Expected Value After Cost: This is the calculated value of the investment after deducting all relevant costs. This figure gives the investor a realistic expectation of what they will be left with.
- Reduction in Return (%): Shows the percentage reduction in return as a direct result of costs. This gives the investor an idea of how much costs are eating into the potential return.
- Expected Return After Costs (%): This is the percentage return an investor can expect after deducting costs. It provides a realistic expectation of the return after all costs are deducted.
- Expected Return: This is the original expected return after costs are deducted, measured in currency.
This table shows the calculation of the aggregated costs, broken down by cost elements in the portfolio. It consists of two figures:
Amount shows the estimated amount per cost element. %* represents the relative share of each cost in relation to the total expected value of the investment before costs. In other words, it provides insight into how much of the expected value before costs is anticipated to go towards this specific cost element. Note: As the images below show, there will be deviations from the cost elements stated in the cost summary and aggregated cost effect. This is due to the following: The costs stated in the cost summary show the list price of the costs, while the aggregated cost effect looks at the estimated costs measured against the value before costs. Costs are calculated per month, based on what is estimated to be invested at the end of the month. The cost used is the annual cost converted to a monthly cost:
Since costs occur at different periods from t=1 and t=12, there will be a different calculation of actual costs in currency if one looks at an annual rate vs a monthly rate. The cost becomes less due to the compound interest effect
Fund Details Amount provides a detailed insight into the individual cost elements, measured in currency (amount). The goal is to offer a detailed understanding of each cost and how they individually contribute to the total cost structure of the investment. By analyzing these details, the investor can gain a better understanding of the specific fees and costs associated with each fund in the portfolio. This can be particularly useful for those who want to understand the exact costs behind their investment choices and how these affect the total return. You open the analysis by clicking on the button, as illustrated below:
To ensure that all the figures in the table are as accurate as possible and provide a realistic representation of the costs per instrument at the start of the savings plan, a specific calculation logic is used. Here are some of the key assumptions and logics that are implemented:
- If the savings plan contains an initial amount, the cost calculation will be based on this investment amount. The reason for this is that it is assumed that the initial amount provides a good snapshot of the investment's structure and expected costs at the start.
- If the savings plan does not contain an initial amount, the calculation will be based on the set monthly savings amount. This gives an indication of the expected costs based on regular deposits.
- All cost calculations are calculated by multiplying by the percentage figures that represent the distribution of the investment in the various funds. These percentage figures can be found in the next section: "Details – Fund, %".
By following this logic, we ensure a transparent and predictable presentation of expected costs, so that the investor has a clear understanding of how the various cost elements are distributed at the start of the savings plan.
Fund details - % provides a detailed insight into the individual cost elements, but instead of being measured in currency (amount) as previously discussed, this presentation focuses on percentages. You open the analysis by clicking on the button, as illustrated below:
In this analysis, one lists and provides a structured presentation of the relevant cost fields for each individual instrument. The line for "Portfolio" is calculated based on the weights in the underlying instruments. For precision, we round off the numbers to two decimal places, making them easy to understand and compare.
There are some general calculations and assumptions that are important to keep in mind when using the analysis:
- The effect of costs is defined as: actual estimated costs and the "lost" return as a result of paid costs. In other words, the difference between the expected value before and after costs is greater than the actual costs incurred.
- Costs are assumed to be charged monthly, at the end of the month.
- For the fees configured as a step model we project the savings plan forward in time, and look up the step model every month and read the correct respective fee. In other words, there is a dynamic around the fees that are following a step model.
- The step model is not maintained when overriding fees, as it is assumed that this is kept constant throughout the projection period.