Canadians wanting to manage their investments have up until now had three choices for their savings:

  1. Open up a self-directed brokerage account, pay the trading and account fees,  and build a portfolio on your own with no advice from the brokerage.
  2. Go to the bank (or have a mutual fund or insurance salesperson come to your house), pay a management expense ratio on mutual or segregated funds in excess of 2%, and get varying levels of “advice” for “free”.
  3. Find a fee-only investment manager close enough to you to do business with you, pay 1% on your total invested assets with them (provided you have enough money to meet their minimum, usually somewhere in the $500,000 and above range), and get financial planning and investment management services included in your annual fee.

In general, those of us with less than $500,000 to invest have chosen the bank route by default simply because that’s what’s available in our town, and something is better than nothing, but with the new low-cost and low-to-no minimum investment advisors like Nest Wealth, Wealthsimple, WealthBar, PortfolioIQ, and ShareOwner Model Portfolios* joining active manager Steadyhand online and across Canada, there’s a fourth option, and one that should completely replace the bank and insurance salesman as a default option.

Why should you investigate what the media are collectively referring to as “the robo-advisors” (an inaccurate but appealing shorthand)? You probably already have some kind of portfolio, is it really that bad that you ought to consider completely replacing it with something new?

Here’s why you should think seriously about it:

None of them are tied to bricks and mortar, and are therefore (for the most part) available across the country no matter how small a town you live in or how far away from transit your apartment is, and

If you’re paying 2% (or more) for a bunch of mutual funds your investment advisor picked out for you but can’t articulate in one or two sentences what else that advisor does for you, you’re paying too much.

 

So how do the robo-advisors stack up against each other? Who’s the winner?

 

As a financial planner and occasional personal finance blogger, it’s really very tempting to look at each of these companies and declare a winner based on cost alone, or the combination (or lack) of services I value most, or what I think the average investor should want from portfolio construction and advice. But the reality is that each of us falls somewhere along parallel spectrums: an ability spectrum, that moves from “knows a lot” to “needs hand-holding”, and a wealth spectrum, that moves from “small nest egg” to “significantly large pile of money”.

In short, you and I and the neighbour across the road might all need more or less help with more or less money, and while one provider might be a perfect fit for me, another might be just the ticket for you.

I unequivocally believe that – provided you have the relatively small amount of time necessary to set it up and maintain it, and the relatively large amount of intestinal fortitude to stick with your plan no matter what the markets are doing – a self-directed, simple Couch Potato portfolio of low-cost, index ETFs or mutual funds is the best investment strategy for most Canadians.

However, intestinal fortitude when it comes to market gyrations, investing fads, and scary or exuberant magazine covers doesn’t come easily or naturally to everyone. There’s no shame in wanting someone else to manage your investments, offer sound asset allocation advice, rebalance across multiple accounts, watch for tax-efficiency, and act as a dispassionate barrier between you and impulsive action when you’re tempted to abandon your long-term plan in light of short-term events, provided you know what you’re paying for…and receiving it.

I want to be really clear here that “investment management” and “financial planning” are two different things frequently offered by the same person or company at varying levels of skill and almost always conflated in the popular and media imagination.

Financial planning and coaching is the context, the “what I want and need my money to do for me as I live my real life”, and investment management and advice the tool, the “and this is how my investments specifically will do it”. Investing is one of the many tools we use to live the life we want, but it’s not the only one. Sometimes it’s not even the important one. It shouldn’t be a surprise that I believe your financial planning should come from someone you’ve paid directly, that your investment management should be separate from that advice, and that both sets of fees should be low.

 

But doesn’t a higher fee mean that the advice I get will be better?

 

Listen, “you get what you pay for” doesn’t apply here, even though cost alone cannot act as the only indicator for how well an advisor will serve you. There is indisputable evidence that low fees are good for investors, and in the absence of a quantitative metric for how “good” someone’s advice is, using lower fees as a proxy for how much more important your bottom line is than theirs seems pretty savvy.

So as you’re seriously considering what the low-cost investment managers are offering (and you should be), I’d invite you to use the Canadian Investment Fee Calculator as a starting point to calculate the relative cost of each service for the amount of money and number of accounts you have. With that information, you can compare the services based on where you fall on the “how much money do you have?” part of the spectrum. That’s the objective part of the choice.

The subjective part of the choice (although each provider would and has argued that it’s not subjective at all) is all the rest of the information you need to spend time considering, preferably by calling each provider, telling them about your situation, and asking questions like:

  • How the portfolios are constructed and why those particular funds or ETFs are used
  • What institution acts as the custodian of your investments
  • Whether financial planning of some kind is included in the fee, if it’s purely investment management, or if all you’re paying for is access to the portfolio with no advice included
  • How often you’re able to talk to someone if you need to
  • How well-developed their retirement income and decumulation strategies are

If you can’t articulate what it is that your investment advisor is doing for you right now beyond picking out investments, or – worse – how much it’s costing you, write this down right now:

I will give myself until next month to investigate the different low-cost online investment manager options, and I will decide on one and start the transfer process

Or you can make a decision by virtue of not taking any action at all, and continue to pay outrageous fees for an Advisor Six-Pack and planning services you’re not actually receiving.

*ShareOwner Model Portfolios, not to be confused with ShareOwner’s “build your own portfolio” account, which isn’t a contender for the purposes of this comparison.

 

 

 

Sandi Martin

Sandi Martin is an ex-banker and fee only financial planner who specializes in working with regular folks who suspect their money might be a bit of a mess. She lives in beautiful Muskoka with her husband and three children, and works online and by phone with clients across Canada.

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