Every investor who’s fired a bad advisor and become a do-it-yourselfer has probably had mixed feelings. On one hand, it’s liberating to get away from a costly strategy that was performing poorly. But if you’ve never managed your own portfolio, it won’t take long to realize it’s not as simple as you first thought. In the last couple of years a growing number of US investors has been bridging that gap with online services that design, implement and manage ETF portfolios for a fraction of the cost of a human advisor.
These so-called “robo-advisors” take you through a series of questions to determine your goals and your risk tolerance and then build a diversified portfolio using an appropriate mix of equity and bond ETFs. The service looks after rebalancing and reinvestment of dividends: all you do is contribute regularly and the software does the rest. Wealthfront, which bills itself as “the largest and fastest growing software-based financial advisor,” even includes tax-loss harvesting for accounts over $100,000.
The cost for all of this? At Wealthfront you can invest your first $10,000 for free, after which the fee is 0.25% annually. Its largest competitor, Betterment, charges 0.35% on balances under $10,000, 0.25% between $10,000 and $100,000, and 0.15% thereafter. This includes all transaction costs, but not the management fees on the underlying ETFs, which add another 0.15% or so to the price tag.
For the right investor, it’s difficult to imagine a better solution. A good advisor can add a lot of value for clients with large portfolios (especially in taxable accounts), as well as those who need planning services. But there’s a huge number of families with five-figure RRSPs who don’t need the services of an advisor—and they aren’t getting attention from their advisor even if they have one. Many are paying 2% or more for rotten portfolios and nonexistent service. While it’s easy to tell them to become DIYers, the truth is most are not capable of effectively managing an ETF portfolio on their own. A software-based solution could cut their fees by 75% and deliver better results with minimal effort.
Even savvier investors would benefit from services like Wealthfront and Betterment: sure, they could save 0.25% or so by building and maintaining their own ETF portfolio, but there is a huge behavioral advantage to automating your investment plan. Although making regular monthly deposits and periodically rebalancing a portfolio sounds simple, most people are temperamentally incapable of doing so. (There is ample evidence to demonstrate this, and my e-mail inbox would corroborate it.) I’d estimate the discipline imposed by a robo-advisor would easily add 0.25% to what most DIYers would get using the exact same portfolio.
Unfortunately, there’s nothing like Wealthfront or Betterment in Canada. Will we ever see something similar in this country?
A daunting challenge
I’ve spent a lot of time thinking about the robo-advisor model and discussing it with colleagues. As much as I love the idea, it’s hard to see how it could ever be a viable business in Canada. Wealthfront launched late in 2011 and recently crossed $500 million in assets. While that’s a lot of money to you and me, when your fee is just 0.25% it works out to gross revenues of $1.25 million annually. Not chump change by any stretch, but it’s not even enough to pay for overhead and salaries.
Yes, it takes time for any start-up to turn a profit, and Wealthfront claims 450% growth in 2013, so it’s very possible the business will become lucrative in the future. But the robo-advisor business has extremely low margins and can only survive by building enormous scale. In a country with a population ten times smaller than the US, how can an online financial advisor ever do that?
My guess is the vast majority of robo-advisor clients have four- and five-figure portfolios. If these investors are paying 0.25%, their fees aren’t even covering the cost of the paperwork. The most profitable way to build scale in the investment management business is to go after high-net-worth clients. But investors with large portfolios aren’t likely to be attracted to generic software-based solutions: they’re much more likely to recognize the value of paying a professional for good advice tailored to their individual needs. They also have access to the best advisors and the lowest fees already.
There is one advantage robo-advisors would have in Canada: fewer good alternatives. American investors with as little as $1,000 can already go to Vanguard and buy a target retirement fund for 0.16% to 0.18% annually. So Wealthfront and Betterment will have to wrest assets away from a juggernaut with even lower costs. In Canada, robo-advisors would face far less worthy competition and might be able to grab a bigger share of the DIY investor market.
Unfortunately, I have to conclude that software-based portfolio management isn’t likely to become a reality in this country. But I sincerely hope there’s an entrepreneur out there who will prove me wrong.
You outline very well why 0.75% is a reasonable fee. But some say the scale should really slide after the first $1M. I don’t agree, as it’s still work and responsibility.
You’re probably right that we won’t get automated advising (including things like automated tax loss selling) for years, if ever. I’d imagine the regulatory thicket is too strong. And there’s also the reality that private investors simply don’t have as much money to invest… total RRSP assets in Canada are only in the neighborhood of $650-750 billion depending on which estimates you look at, and a lot of that money is not going to be moving around, so new entrants would need to target new accounts.
But I’m sure we’ll get automated ETF rebalancing from at least one broker relatively soon. That’s low-hanging fruit.
That would be a great service – despite CCP’s pessimism I will keep my fingers crossed.
Figuring out tax issues for non-registered accounts is particularly vexing for the DIY investor, and a robo-advisor would be a huge help.
One such software-based portfolio manager has started up in Quebec- Idema Investments. I discuss it and the situation generally in Canada on my web site IndependentInvestor.info
Marc Ryan
BMO Investorline AdviceDirect is something like this. There is an element of human advisor interaction and fees are higher (1%) with a minimum $100k. It’s not quite as simple/accessible as the US models, but a Canadian step in that direction.
Virtual broker has a program called “Kick Start Investment Program” that, while requiring more manual work, pretty much seems to allow automatic monthly purchases of pre selected ETFs in a portfolio. I don’t know all the details but what I see on their page is interesting:
– Free for students, otherwise annual fee of 50$
– No commission fees
– 100$ minimum monthly contribution
It’s too bad, really. This strikes me as one of those really good ideas in principle, that offers the potential to help a lot of people if employed right … and yet there’s just no money in it.
Kind of like writing a blog. ;)
I think the fees mentioned are rather severe for managing a “couch potato-like” portfolio of ETFs. I suppose there will always be a segment of the population who have no clue in what to do, or don’t want to know what to do, with their investments.
Thanks for writing this post. I am the co-founder of WiseBanyan (http://www.wisebanyan.com) a competitor of Wealthfront and Betterment. We are US based, and we were having a conversation about the Canadian and UK markets on Friday. After some VERY preliminary research, we found that there were some obstacles, but they were not hugely onerous:
1) we would need to register in each province in which we wanted to do business. As a business decision, we would likely initially register in Ontario, Quebec, Alberta and BC.
2) we would want the be the ability to offer fractional shares. We, like Betterment, offer fractional shares (Wealthfront does not). This makes it possible to take $100 accounts, whereas if we had to do full shares it would mean much larger portfolio sizes (like Wealthfront). We would need to partner with a local broker dealer who could give us the ability to offer factional shares.
3) we really didn’t have a complete picture of Canadian saving and investment patterns. For younger people in the US, there is little expectation of a pension plan, and many of us have written off social security. We wanted to understand better whether Canadians counted on these things – if the majority of Canadians did, they might not be as interested in a DIY approach.
I’m psyched to see a discussion starting up on this blog. If anybody has some insights or thoughts to share on how younger Canadians are viewing investing, I am all ears! Despite the similarities between our two countries, we are hesitant to think that an approach that we are marketing to the US “millennial” generation would have broad based appeal north of the border.
-Herbert
If these “robo-investment” companies offered side services like tax help, retirement set-up advice, helping people in debt etc. (money coaching) Maybe for a reasonable fee as well they could make additional money and add value for their clients.
For me i feel the most difficult part of my financial plan is going to be the first year I retire. When you have to manage the TFSA, a work pension, and your RRSP, all at the same time so you pay only what you “have to” in taxes and make the most of your invested money. I think that will be the most complicated time of all. That’s when an adviser that knows what they are doing, would really be helpful!
@Paul N,
Once you retire, if you are able to live off of your pension & CPP, you don’t need to make decisions on your RRSP ,TFSA or other investments right away. I’ve been in this boat for over two years now. I don’t plan to tap into my RRSP until I have to at 71. Believe me, one can live very comfortably on 50% of there pre-retirement income if their home is paid off and they are reasonably healthy.
While Robo index investing sounds good it is extremely difficult to implement. I have reviewed Wealthfront’s offerings extensively and when you look at the number of software engineers they have, the people they have on staff including some luminaries like Burton Malkiel who wrote the seminal book on investing, A Random Walk Down Wall Street, their Board of Director makeup, their management team etc, you realize this is a substantial operation and an extremely well run business. They have thought of everything. Tens of millions have been invested in getting it going yet after a few years they are only reaping $1.25M in fees per annum with only $500M in assets. It is going to take a long time until the business scales to the point where it is profitable.
On top of this, while Robo index investing sounds automatic and as if it runs itself, it is not like clients still don’t phone in, ask questions, need to be ‘sold’ to, tutored, etc.
If I lived in the US I would recommend Wealthfront to friends in a second. I wouldn’t use it myself as I have my own index investment program on autopilot already after the initial familiarization, learning and setup process. The other aspect to be cognizant of is that just because someone sets up a Robo index investing program in Canada doesn’t mean it will be as well-run as Wealthfront, have the same features and not have glitches or even be sustainable. Given the challenge of doing so and the investment required I doubt it will happen here or, if so, be implemented as well as Wealthfront. If it does I think it will be Wealthfront doing it as they have already laid the groundwork in the US and a lot of the infrastructure.
@Bernie
Thanks for your reply. I think mine will be a little more complicated. Lets for arguments sake I will have a work DC pension of $500K and my RRSP will have $500K. I also have already worked enough years at met the required level to receive the Maximum CPP benefit I can get. Say i have $100 K in cash as well. Also I’m single.
Firstly with my great work pension (Sarcasm-I have wrote about it before here) Within 60 days of leaving or retiring I have to make some choices or they will be made for me. Our provider WILL force me from their high fee crappy funds into an equally if not more high fee BS locked in Annuity. So they can continue to steal 2+% from me forever. Anyone out there who has a DC work pension maybe should read the terms and conditions closely, you most likely will have the same rules. So I have to transfer that out somewhere else so I can be more in control of it. I doubt that will be simple, I have asked for further clarification from our provider, they only like to give the minimum of information. I’m still a ways away from retiring, but it’s not that long anymore. A couple of more snows here in T.O. though and I may reconsider and do it sooner :) .
I guess you want to balance your withdrawals so you can take out enough for your day to day life, not get a claw-back of your CPP, and try to maximize your tax savings. I don’t think that is that simple, (correct me if I am wrong)? What happens at 71 for yourself. Won’t you be forced to withdrawal a certain amount and have to pay a lot of tax? Maybe planning for that now may set you up better for that time?
Again… this is the part that confuses me. I have been fairly successful with my investments so far, but I don’t want to paint myself in a corner by making the wrong moves down the road. I also don’t feel its fair to pay a broker 1 or 1.5 % of Total assets, just for the short period of advice needed that they give. Probably fee only would be best then. Plus how do you know you will get the “smart/fair” adviser and not the the other type?
Today is my day off so I was tinkering on Google spreadsheet, using CCPC rebalance worksheet, to create an online version that would grab data from Google finance. I’ve also included a few extra columns to account for some ETF’s that are in USD, as well as exchanging currency.
Here is the link:
https://docs.google.com/spreadsheet/ccc?key=0AlAmBfTsdB3odDBLenNxTnNLZXRnRWRmNlRvODFPQ1E&usp=sharing
It’s based on the Complete Couch Potato portfolio. All you have to do is put in the the money you’re adding today, as well as the no. of shares. The spread sheet should do the rest.
You’ll need to save it under your own Google account before you can use it. All credit goes to Dan and CCPC.
Btw, Wealthfront raised $3M angel, $7.5M A round and $20M B round financing since Dec 2008, ie a total of $30.5M, manages $538M in assets as of January 13, 2014 and therefore earns revenue of $1.345M per annum at their fee rate of 0.25% of assets (actually slightly less because they don’t charge on the first $10K), and that’s revenue not profit! I think the chances of any entrepreneur attempting to start up such an independent business only in Canada with a market smaller than the size of California and a much smaller and risk averse venture capital community to draw funds from is slim to nil. Robo investing may come to Canada as a result of a US firm expanding here, but it certainly won’t start in Canada first.
And, Dan, you should say ‘fortunately’, not ‘unfortunately’ that you ‘have to conclude that software-based portfolio management isn’t likely to become a reality in this country’ because if it did that would only give you more competition at about 1/3rd of the ongoing fee you charge on accounts.
I don’t see what a this service will do more that a good spreadsheet will do. If you are too lazy or dump to figure it out, put all your money at ING streetwise portfolio, it is almost the same as reboot adviser.
@Paul N,
I see you have more moving parts involved than I do. Perhaps it would be best to find a fee only advisor. I live in AB so I can’t suggest anyone for you. I had a full service advisor for 9 years up to 2008. Their fees were 1.75% of assets annually and underperformed the market by a great margin. I’ve done very well since I went back to DIY. That said, it has been a bull market & most everyone has done well since the past recession. Going forward I think I’ll be fine. I’ve made my portfolio more defensive plus I have another 8 years to accumulate until I turn 71. The mandatory withdrawal rates on RRIFs can be rather severe but I have the advantage of having a much younger spouse. The younger spouse’s age is used to set the withdrawal rate. Also, my RRIF income won’t be a necessity or create a problem with claw backs on OAS. There are no claw backs on CPP income.
Sorry, I can’t be of more help to you. I’m sure you’ll be fine. It sounds like income won’t be an issue with you so much as tax planning. There are many knowledgeable readers on this fine blog, plus the author, who may be able to give you some suggestions pertinent to your situation.
@ Francis
This is why :
1.07% MER for the streetwise fund
vs.
The Canadian couch potato portfolio : (The more expensive one)
The total annual cost of this portfolio is 0.44%
Over 25 years that’s a HUGE difference for not taking a few minutes and re-balancing yourself.
@Paul N
You beat me to it. A service like WiseBanyan or Wealthfront also adds value by providing free trades – a not insignificant % of assets under management for smaller accounts.
I actually wrote about this recently: in the future, I believe that a lot of these fees that we see will go to zero. Even with the costs of setting up a Robo manager, there is no marginal cost, and there are initial revenue sources once you have the fund base. Same thing with brokerage commissions or ETF fees. See a little bit more here: https://medium.com/dont-be-good-be-great/6b710489e481
@Noel makes a good point that you need A LOT of assets to hit the scale that I am talking about, so comparatively small markets might not see these changes for quite some time.
@Herbert. I took a look at your website and there seems to be a few hurdles right now to using your service (invites, waiting list, etc). Is that because you are in beta so you don’t really care at the moment about gathering assets rapidly (or at all right now)?
Also, one of the services you hope to charge for, which is tax-loss harvesting (and maybe others you have not mentioned) is included in Wealthfront’s 0.25% fee structure so the difference between you and them may not be that great when your fee for that and other services for which you want to charge is included. Also, as for enhanced indexing, which you mentioned you will charge for, I am not sure what your definition of it is (what is it?) but I bet that would be something Wealthfront would also add without charging more if they thought it would add value for the bulk of their clients given they already have their engine running in high speed.
Lastly, I don’t think we will ever see most fees go to zero. I think 0.25% for Wealthfront’s all encompassing Robo indexed portfolio management services is very reasonable. That’s pretty low already, especially compared to non-Robo services like PWL who charge 1% on a sliding scale for personal portfolio management (and I want to make it very clear I think PWL’s fee for ongoing service is very reasonable if you are not willing or able to be a DYI-er) And, as with everything you get what you pay for and it won’t be much at zero cost to the client.
@ Noel
We are in beta and have assets on our system. We are also taking people off of our waitlist, albiet at a much slower pace than they are joining. Our ADV is public record and WiseBanyan manages $11 million. Yes, there are hurdles, but because we are undergoing a relatively public launch, we want to control the flow of people onto our system.
Yes, we do plan on charging for additional services. Tax loss harvesting might be free, but if we do charge for it it will be less than Wealthfront’s 0.25% and the minimum assets to take advantage of it will also be lower. Sure, Wealthfront could probably replicate our enhanced indexing strategy, just as I could replicate every portfolio wealthfront has. Neither of us invented the efficient frontier, modern portfolio theory, or mean variance optimization.
While I think that Wealthfront’s fee is a step in the right direction, but I think that fees will continue to come down. Betterment started with 0.95% fees and now is substantially lower. ETF fees are substantially lower than they were before. As these platforms grow and scale, the largest will be able to offer the same service for very little fees.
@Herbert. I don’t see much that Wealthfront really has to add in order to provide a complete service. They provide an all-encompassing service for that 0.25% fee. As for enhanced indexing, I think it is dangerous to step outside the boundary of index investing before one has even tackled that business focus successfully. Enhancing index investing by incorporating aspects of active management (which I think is what you plan on doing – correct me if I am wrong) seems like a bit of an oxymoron.
What I like about Wealthfront and why I think they will be extremely successful (they are the leader in this space right now) is they focus on doing one thing really really well – traditional index investing. Maybe after one has gathered the first $100B in assets one should work on exploiting alternative strategies.
@Noel
Your point of not spreading ourselves too thin is well taken. The idea of adding an enhanced indexing strategy is a natural fit for us as it was my focus prior to founding WiseBanyan. It is not specifically active investment, as it is a covered call program to create dividend like payments for investors. It will be run in a passive manner (no individual security selection), but I understand how the name could be misleading.
Lots of interesting comments here! It’s especially interesting to hear from Herbert at WiseBanyan: great to learn you’re at least looking at the idea of coming to Canada.
@Marc Ryan: Many thanks for pointing us to Idema Investments, which I was not aware of. For those willing to learn more, visit Idema’s site and read Marc’s review:
https://www.idema.ca/en/Services/do-it-yourself-service.aspx
http://www.independentinvestor.info/content/view/1006/1/
@Aunt Sarah: In my mind, a software-based service only makes sense if it’s very cheap. I’m, not sure why anyone would pay 1% for a service like AdviceDirect when you can hire a human advisor for the same cost and get far more service.
@Simon: The Virtual Brokers Kick Start program is interesting. I would love to hear from any readers who have used it and would be willing to share their thoughts:
https://www.virtualbrokers.com/contents.aspx?page_id=119
@Bernie: “I suppose there will always be a segment of the population who have no clue in what to do, or don’t want to know what to do, with their investments.” I don’t mean this to sound insulting, but that’s the vast majority of the population. If you are genuinely interested in investing (and therefore inclined to read a blog like this) it’s easy to forget that. It’s also important to appreciate that many people are very good at paying down debt and saving, etc., but that doesn’t mean they are expert investors. And why should we expect them to be, any more than we would expect the majority of people to be able to replace the brakes on their car or install pot lights in their basement?
@Noel: “Dan, you should say ‘fortunately’, not ‘unfortunately’ that you ‘have to conclude that software-based portfolio management isn’t likely to become a reality in this country’ because if it did that would only give you more competition at about 1/3rd of the ongoing fee you charge on accounts.” I appreciate your concern, but no good advisor would feel the slightest bit threatened by the appearance of robo-advisors. I can assure you we would not lose a single client to such a service. The idea that our service is something that can be replicated by software reflects a profound misunderstanding of what an advisor does.
Dan, rest assured I profoundly understand what an advisor does. Just giving ya an opening there to toot a bit ;)
@Herbert. Most millenials do not have private pension plans and our social security is not as generous as in the US. It tops out at about $18,000 a year, and although 2/3 of that is currently fully funded, the top one third is not and is also progressively clawed back above about $70,000 of income. So I think there is plenty of interest in saving for retirement in Canada in this group.
The problem I think Robo Advisors will have is the behavioural one. Young people, especially, tend to underestimate their risk tolerance in the good times, then when the market crashes, particularly if they don’t understand the basics, they may pull their money out.
I would like to see a hybrid of robo-investing like Betterment plus hourly fee for advice using Skype/Facetime etc…
Those fees for hourly advice could be a revenue bridge toward more economies of scale as the business grows.
Startup costs may be high relative to fees for a robo system but a key factor in their business model is that those fees are probably there forever and will grow with the growth in assets under management besides potential growth in the number of customers.
I would imagine the use of the hourly advice service would be higher in the early years for each account holder and the degree of “hand holding” required may lessen over time. Also many of the services that would be implemented using face to face contact are set for long periods of time once initialized (estate planning, insurance, some tax planning etc…).
There is frustration amongst some (at least those I know) that they sometimes are not getting value for money in financial fees but it seems to be a bit of a function of how well the equity markets are performing. For instance in the past year those I know with active advisors are happy with the returns, perhaps not recognizing that their returns are basically what the market offered – but several years ago were not as happy. In general though with many advisors its not always clear what those fees are and what they are buying. The robo+hourly advice fee model is transparent.
For Canadians paying the typical 2% plus mutual fund fees the savings could also be substantial, even with a relatively high hourly fee. Demand for a robo+human service could grow if it becomes clear we are in a relatively lower return world.
Having personal service combined with robo would make the business at odds with itself. You have to focus on one or the other to be successful, otherwise it becomes unwieldy and not scalable.
I wonder if the comparison to the US is missing both the point and the opportunity. As I understand then 9 out of 10 Canadians own mutual funds and many many Canadians are paying 200bp+ fees on their investment portfolio (215bp for average Canadian balanced fund per Morningstar). While CPP portfolios commendably involve fees at a small fraction of average Canadian mutual funds then CPP practitioners seem a lousy target market for such a service. Not much pain so I’d argue to ignore CPPs. Sorry, you guys are just too darn good!
If a value proposition instead targeted non-CPPers. And forgot about CPP-costs but simply sought to reduce fees to a level say around those per ING Streetwise. I’d not get hung up on 0.25% as I’d suggest that competitive-enough pricing in Canada could be somewhat higher. Yes, I understand that 1% advisors are gaining momentum but I wonder if the real opportunity is with consumers that have assets below a level suited for such advisors (say $50-$100k?).
I’m curious as to which service components are must-have and which are nice-to-have. Perhaps a Canadian solution could be significantly lighter-scope (i.e. simpler) than the Wealthfront / Betterment. Is ‘Robo-Advisors’ the only solution – I suspect not. For example then loss harvesting seems a non-core offering, or a pay-for-service extra module. How much software is really a must-have? (isn’t the whole idea to invest + not tinker!). A non-Canadian fund manager with which I have some [low-cost index-tracking] pension asset provides really lousy market data … while frustrating at times then it does avoid the temptation to trade and/or, heaven forbid, try to beat-the-market.
I’ve been considering opportunities in this space for a few months now. Not yet shaped a value proposition on which I’d be willing to hang my hat. And compliance by-provence seems ineffective and costly, but that’s Canada and seems unavoidable. That said, the sheer magnitude of the fee gap between ‘average’ and ‘efficient’ seems breathtaking.
i would go for such a service with my quarter mil. as you pointed out i am one of those fearful (conservative) guys who just sit in cash. an automated service would suit me best. if i do grow the guts to commit…
I think these estimates of Wealthfront’s revenues are missing the fact that they are probably advertising to their clients using knowledge of their net worths. I don’t imagine they are just making money from the 0.25% fee.
@Mike Bichan. They don’t do any ‘advertising to their clients using knowledge of their net worth’. They have only one fee scale – 0.25% of assets (free if under $10K in assets).
Yes they are making money only from the 0.25% fee, but not yet profitably. There are absolutely no other revenue sources, so the estimate of Wealthfront’s revenues is indeed accurate.
Am I the only one who feels the 0.25% of assets fee is too steep? $1,250 per annum advisor fee for a $500K couch potato ETF portfolio seems outrageous to me! I wouldn’t even pay that amount for a one time levy to set up something so simple.
@Bernie. 0.25% is more than reasonable. You are comparing it to doing it yourself which is an unfair comparison. Most firms doing index investing start at 1% and then a sliding scale which kicks in around $1M or so.
I know a lot of people that would be thrilled to death if Wealthfront and their 0.25% fee came to Canada.
@Bernie, Noel is right. Canadian investors have different thresholds of ‘need’ in regards investment assistance and it seems that you’re much more DIY-able than the populous, if indeed likely more than many conservative CPPs. I suspect that rather a few Canadian investors may not consider this ‘something so simple’.
Whether 0.25% is too steep is, I suspect, dependent upon the degree of discipline of the investor in setting up a cost-effective, risk-diversified, tax-effective portfolio; avoiding the temptation to needlessly trade; and remembering to rebalance periodically. My instinct is that such traits are far from common.
@ Bernie – I am going to agree with Noel on that last point. For a beginner in particular to get management at that low cost is really a first of its kind.
@ Noel – a little further above I disagree with one of your points. If a broker service charges 1% or more on top of let’s say even 0.5% for a mix of etf’s we now have created a 1.5% MER. I’m finding that since brokers are finding people more informed and they now ask for ETF’s vs high fee funds , the brokers just change the game and add a management fee so you are not better off fee-wise. At 1.5 % you can take a very simple no load balanced MF fund like the TD monthly income fund which has a 10 + year average return now close to 9% . I understand this has little exposure outside of Canada but you can’t knock it’s simplicity, ease of contributing for the simple investor. I have brought this example up before. We could all have our great ideas of creating the ideal portfolio but sometimes something this simple beats up all our attempts to create “the perfect portfolio” or perfect stock mix over the long term. Something like this has to be frustrating to brokers. Just being the devils advocate here and generalizing here just to look at this from another perspective.
@ Paul N – I am not quite sure which of my points you disagree with. But, you can easily achieve a 0.25% MER or less with a diversified ETF portfolio. Adding 1% to this for it to be managed by a firm like PWL makes the total MER 1.25%, which is about 1/2 of what the MER would be if you invested in a portfolio of actively managed mutual funds. So, yes, you are better off fee-wise.
At the same time your portfolio would be assured to achieve market returns less the tracking error and the 1.25% MER, something which actively managed funds have a tiny chance of ever achieving given their active nature and their higher MER, not to mention the higher income tax drag of active funds due to more turnover.
As for you suggesting a single actively managed mutual fund instead because of it’s past performance, well I am not even going to comment on why I think that advice is ill-placed compared to a diversified portfolio of index ETFs with an MER of 1.25% or lower if you use someone like PWL with all the additional services they provide or do it yourself for an MER of 0.25% or less. This entire web-site speaks to that.
@Paul, as I understand then the fee model of fee-only advisors is a) dependent upon portfolio size (<1% as $ increases), and b) optional structure (some fee-only firms charge one-off setup fee rather than ongoing % fee, as preferable to investor needs). No right answer, just choices.
@ Ross – thanks you put the point I was trying to make into a concise 2 sentence answer. I have never been good at doing that.
@Noel – I am not really a fan of many mutual funds. I have replied to many a post on line with that in mind. The fund I am talking about is simply an example. It is actually marketed as an “all in one fund” for the lazy investor. Some call it a closet index fund with a bond component. Not all MF’s carry a 2.5% MER. And/or a front and back load charge. Your reference to the old line of “past performance does not indicate future expected results” is out of place when talking about that fund in particular. It’s a proven fund with a very long history of good results, not a fund that was good for 2-3 years then nosedives into oblivion, that’s when that statement should be applied. Maybe Google : “Steadyhand” funds and their products – would you say the same about them??? There are choices yes.
I just have issue with any company taking 1% (you wrote a 1% fee was highly reasonable way above, that was what I referred too) or more of TOTAL assets. After the first year the maintenance on a portfolio of 5 ETF’s is simply re-balancing and reviewing a policy statement and adding new money a few times a year. If I have a $500,000.00 or $100,000.00, its really the exact same work during the accumulation phase. But its $4000.00 more in fees plus lost opportunity costs for no more added value for the person with the $500K. The person with the higher amount should have a cap on the fee at say apx. $1500.00/year IMO. That’s the longer version of the point I’m making. That is still an expensive MER just packaged differently. I tried to use an example, but maybe not the best though.
Secondly people simply want the easiest route to do things and they are afraid of change. I understand what you are saying above and don’t disagree at all with the DIY low cost approach. I doubt if you talk to 20 regular people 19 of them have not even the first clue. To get someone to transfer money from their bank to an outside brokerage, then try to sell them on this good model you speak of here? That will be a very tiny % of Canadians. Most of my friends are even afraid to use a mortgage broker because its simply not a big bank it it seems like “so much work” or aliens run the company! They would rather pay 1-2 % more and lose thousands. The first step before a robo investment model works is trying to explain the advantages to someone who will listen and isn’t afraid to leave the” security” of their bank. It’s a good idea but it will take a long time to catch on.
@Paul N – No not all MF’s carry a 2.5% but many do and some are even higher. As for my comment regarding past performance that still stands. Past performance proves nothing (other than that winning streak will likely end!), not to mention it makes more sense to ensure you get market returns (less the drags) with ETF’s than the likely lower return of active mutual funds. Bill Miller , the manager of the Legg Mason Value Trust, had incredible performance in beating the S&P 500 for 15 years straight (ie both each year AND the average) and it all came crashing down in only a couple of years. Nothing makes the TD Income Fund less susceptible to a decline in performance similiar to what happened to Bill Miller. If so I’d like to know what special sauce they have.
As for fees paid to those managing a diversified ETF index portfolio, many do incorporate a sliding scale of fees after an initial amount. I know PWL does. I think it kicks in after the 1st $1M with PWL, but is 1% of assets up to that amount (Correct me if I am wrong Dan). But, what you are saying is the fees should be capped, meaning the sliding scale goes right to zero. That is ridiculous and no one would offer that type of a fee schedule for the increased responsibility of managing a larger portfolio. I know you do not think it is more work and maybe it is not the same work as acquiring the client, initially setting up the portfolio and managing a certain initial asset level, but it is more work.
Maybe Dan you could pipe in and justify why your fee scale does not go right to zero for anything above an initial threshold amount (other than the fact that anyone doing this would likely end up with a business that was not financially viable).
I chuckled, btw, at your mortgage broker example which I totally can identify with. I recommended one to a friend who took early retirement a senior post at a large bank and thought he was getting a really preferential mortgage rate. He started investing in rental properties and I told him to talk to a mortgage broker. His response was that “only desperate people do that and I get the best rate possible anyway”. I was eventually able to convince him to and he has thanked me profusely ever since because the rate he has been able to get through a broker was way better than the ‘preferential’ rate he got as a retiree from the bank. Mortgage brokers are great because they do all the work of shopping your deal around to all of the institutions at once and it doesn’t cost you a dime. The institution pays.
As a Financial Planner with a major Canadian bank I don’t buy into the concept of virtual advisors because it’s a strategy that is cutting Canadian jobs. I think people should have the option to come into a bank, sit down with a real person and discuss their portfolios. However dishonest advisors who cheat their clients has to stop. It creates a media frenzy and gives the rest of us a bad name.
This is why it’s so important to have regulators in place who monitor activities and compliance departments who make sure advisors always act in the clients best interest – not in their own best interest for a commission and not in the bank’s best interest just to sell a product and generate revenue.
@Tahnya – Keeping your job is not a good enough reason to limit people’s options in reducing their costs and employing a passive index strategy by having their portfolio managed by a Robo manager similar to Wealthfront that employs only index ETFs and charges fees as low as 0.25%. If your higher fees and personal service does indeed add value I am sure you will be able to market yourself effectively to clients.
Also, the main problem with the investment industry is not dishonest advisors but the high fees charged for active portfolio management strategies that are proven to not beat their benchmarks 19 out of 20 times over the long term. Fund your income out of my portfolio when the lower cost higher return option is so obvious? Um, no thanks.
As for dishonest advisors cheating their clients, what date is that stopping?
@Tahyana
I have to agree with Noel on this one. The name of “financial planner” at the major banks is something that is used far too loosely and is something that should be reviewed. Unless you have taken a securities courses and you have the accredited CFP (or greater) qualifications a few courses at the bank does not make you a financial planner. You are a financial salesperson. Most front line bank staff are not qualified to put the average customer in the funds that are truly suitable for them. In Canada we have a suitability standard not a fiduciary standard which means you can ask a person 10 simple questions and then all of a sudden you are an expert and can recommend a security to a client. This is actually ridiculous. The problem is the bank staff really don’t realize the damage they do because they think they really are helping a client out. I have first hand experience with this.
If you read through the articles here and investigate this a little yourself, you will realize we are right. If you yourself invest in the products you speak of here you will also help yourself. I could go on forever on this topic, and send you links to numerous articles backing this up here.
@Noel
I don’t want to clog up CCP’s blog here and debate this with you. It’s not my blog, I want to respect that. I have subscribed to this blog even before it was affiliated with PWL. I’ll try to keep this short.
1) I think that people have to invest in what they are comfortable with and what works for them. For the most part, I like dividend investing, although I have heard all the arguments against it. It’s a choice one makes. Again I could do worse.
2) Although we both agree on lowering fee’s, I don’t know what other value added services PWL INCLUDES in the 1% fee. I clicked on their services – they are a full spectrum broker and can offer insurance and other services. That is a question to ask when sitting down with any broker. If the fee included meetings about tax planning, government changes to the retirement rules, questions that come up, etc. The time spent for that management fee would have to show its value beyond a bank and other firms.
3) For ONLY making a a simple low cost ETF, I still can’t agree with the 1% fee on top. Let’s take everything else out of the case. The whole basis originally of index ETF investing is to save on costs and its simplicity. Now the ETF world has all kinds of products out there messing it all up. Any Monkey can go to the first page of Canadian Moneysaver at Chapters and take a photo of their Canadian model ETF portfolio or use the ones on the CCP website and do just fine if they simply follow the portfolio and buy the etf’s themselves. Simply add money and re-balance. There is no more responsibility with $50,0000 then there is with $5,000.0000.00. You simply stick to your plan. Save your 1%. (depending on what value you receive from point 1)
4) I mentioned above for you to just for comparison, browse the Steadyhand Investment website. Please just look at their fee structure… Not the funds. I think this is a model that all brokerages should adopt. They have low cost funds to start with, bonus MER reductions both for varying levels of AUM and for LOYALTY! Again you took my “Cap” sample idea rather then this one to respond to. To get your first MER break at $1M – that is a lofty goal before you get any advantage. Again I’m not trying to argue whats right for a specific company, but the model i mentioned seems fair. Or as Ross nicely suggested – go “fee only” at some balance point, and then you would at least have some control over your fee’s. So if my MER is $5000.oo for the year maybe I can pay someone $2500.00 to to for their services and invest their recommendations on my own.
Anyway it has been fun discussing this with you…
@Tahnya, as a member of the Canadian mutual fund industry then can you provide insight into why Canadian mutual funds are ranked, in terms of fees, 24th out of 24th countries by Morningstar in their 2013 related report.
http://corporate.morningstar.com/US/documents/MethodologyDocuments/FactSheets/Global-Fund-Investor-Experience-Report-2013.pdf
At issue, I’d suggest, is not whether investors need to sit down with a real person. But rather whether the advice provided is good value-for-money. And perhaps, in Canada, whether the investor understands the direct and indirect fees that may or may not be disclosed to them. There is now a much greater appreciation of the magnitude of the detrimental impact of fees on long term investment performance. Canada is a lame laggard in regards mutual funds. But new entrants and competitive services will – eventually – arrive in Canada. ETFs are making strides. Value chains will change. Good luck.
@Paul, while I support various themes in your comments then I’d suggest that you are probably not in the target market for fee-only advisors (nevermind others) … heck, I’m a Scotsman but you seem even tighter than me :) While it would bring me joy then I rather suspect that average Canadian investor has neither your seeming financial acumen nor investing discipline, so may be willing (and indeed smart) to pay a penny or two more than you for financial advice and execution of a risk-appropriate, well-diversified investment portfolio. That ING’s Streetwise funds have accumulated over $1bn assets in five years is perhaps a glimmer of the market demand.
@Paul – Regarding ‘clogging’ up this blog, why stop now? ;) There are many blog entries with 4-5x as many comments as this one. Regarding your points:
1. Of course. I like dividend investing too especially since I won’t be paying any tax on the $50K of dividend income I will be receiving in Ontario, which equals or is greater than my annual expenses, and don’t have to really worry about the change in stock prices as for me the dividends will be all that matters. But, yes, each to his or her own.
2. Services like tax planning, insurance advice, etc are easily obtained on a fee for service basis by those best suited to providing them (your accountant, lawyer, etc) rather than being part of a 1% portfolio management fee.
3. You may not ‘agree’ with a 1% fee but the reality is you can’t really run a business managing even ETF portfolios for clients for less, except for a sliding scale after a first initial amount (I think the fee slides after the first $1M for PWL). When you say ‘Any Monkey can go to the first page of Canadian Moneysaver at Chapters and take a photo of their Canadian model ETF portfolio or use the ones on the CCP website and do just fine if they simply follow the portfolio and buy the etf’s themselves’ of course you are right. The problem is most people don’t want to, can’t, don’t understand, can’t be bothered [insert suitable reason here] being that ‘monkey’. You can’t compare a company like PWL with qualified professionals and support staff and the salaries that entails, costs like office space, employee benefits, sales commissions, management fees, regulatory fees, etc to someone sitting a home doing it themselves without all of these costs. I’ve worked out the costs and at 0.25% there is simply no money to be made until you reach a certain threshold of assets and even when you exceed that point your profits will be very slim. Why bother? Even Wealthfront which has raised over $30M in venture capital is still not making money at over $500M of assets with their 0.25% fee.
So, I believe PWL’s fee and other such firms, at 1%, is entirely reasonable. Yes, the alternative is doing it yourself and that is your choice. But, just because you can do it yourself for nothing sitting at home without any overhead doesn’t mean 1% is unreasonable for a professional firm to do it for you.
4. I learned years ago that people always work to maximize their own economic gain. That is why the industry will not adopt Steadyhand’s fee structure until such time as competition causes them to. Of course we would all ‘like’ it to happen, but business simply doesn’t work that way.
I do believe that PWL’s personal service and handholding is worth it for the extra 0.75% over Wealthfront’s 0.25%, which is kind of moot anyway given Wealthfront does not operate in Canada and there is no other robo that provides exactly what they do it Canada. But, I still would like to hear from Dan what discrete services with respect to a passive index portfolio PWL provides (ie other than initial risk assessment (need, ability & desire), portfolio construction/asset allocation, re-balancing, tax-loss harvesting, annual portfolio review, etc. I am talking about things other than ability to meet with an individual, handholding, ability to meet with a live person at PWL, etc. Again, not saying their 1% is not worth it but just wondering what the extra discrete services with respect to the portfolio are.
@ Noel
Thanks again for the reply.
First $50 K in Dividends – OK I’m jealous now! :) Tell me again why you need external management?
A full service wealth management service also offers Annuities and insurance products, + + +. Those products make a killing, particularly some annuities. For them to offer a sliding scale fee schedule in the other area we are talking about above will not make or break their business model. They will make money in other areas. ETF investing is supposed to be as low cost as possible, low cost. 1.3% and above is not low cost.
As for the Steadyhand fee model… a few years ago, no load, or low fee funds were simply not available. Now they are common. Its because the industry is changing and I believe we WILL get down to these even lower fee’s. Think of the web connected youth we have. I’m not sure if anyone above mentioned the “Motif” investing on-line (Robo style) alternative as well, only available in the USA I believe at the moment. This is a low cost well marketed Robo service that is working and growing. I can see it attracting future generations. Simple, sweet, click and invest. So never say never!
I don’t know if you have ever tried this fee calculator, if not please do. Have a look at what 0.75% extra does to your returns over 25 years.
I love directing people to this tool when they aren’t aware of how bad a 2.75% fee is vs. a 1.5 % and they fall off their chairs.
Enjoy!
oops forgot the link :
http://wheredoesallmymoneygo.com/detailed-breakdown-of-the-real-impact-of-mers-on-an-investment-portfolio-over-time/