Much like banking I had my investments at Royal Bank of Canada in the form of mutual funds. These were medium-high fee (1.7% MER) with decent but not great return. I knew there were better options out there so I started looking.
What’s an MER (management expense ratio) you ask? Well, you may not really know about them but they are a percentage of your investment which is taken to cover the cost of running the fund. Sometimes this fee is also used to cover the cost of an advisor you may talk to. I personally only talked to my advisor once so it was money being thrown away for me and over the long term it can really add up.
I’m a Couch Potato
I began my investing adventure by reading about passive investing and index funds. The goal of passive investing is not to try to beat the market by buying and selling, it’s to try to match the market. This has proven to be a better investment strategy in the long term. It’s also not hard and is often referred to as the “couch potato” way as the amount of effort required is so low (potentially). You determine a mix based on your risk and stick to it.
Within Canada this has traditionally required you to manage your investments yourself. Buying mutual funds which track indexes or buying ETFs (exchange traded funds) which track indexes. You set up a do it yourself account at a (hopefully discount) broker and perform trades. Once a year you then rebalance your investments according to your ideal mix if they drift away.
I originally opted for this do it yourself approach and transferred my investments away from Royal Bank of Canada (and into Royal Bank of Canada Direct Investing). It took me quite a while to get things set up and going. I decided to buy ETFs yearly and mutual funds monthly.
On paper this looked fine and in practice it wasn’t that bad. What annoyed me and discouraged me was the fact that I had to do the purchases monthly manually. Two times a month I would need to move money around, submit buys, and check to make sure they went through fine. If I received distributions (money the fund earned through investments which is distributed to holders) or dividends I’d have to re-invest this myself (and potentially transfer more money to allow buys to be possible).
At the end of the year I’d have to sell the mutual funds and submit buys for the ETFs. Since ETFs trade like stocks you can only hold whole shares, which meant having some money left over to put back into funds.
This was just enough to annoy me so I explored other options which sit in between DIY and normal mutual funds: robo-advisors.
Robo-advisors have been around in the US for quite awhile but have only recently made an appearance in Canada. Due to regulations and industry though we don’t have quite the same ecosystem. Our robo-advisors are more better named as on-demand advice services. While automation takes care of some things there are still people available. The difference to other advisory services is that you are the one who reaches out to them instead of the other way around. Personally I find this more appealing.
How It Works
When you sign up with an on-demand advice service they determine a portfolio mix depending on questions that determine a risk level. “If my portfolio value dropped by 25% I would blank.” That sort of thing. The portfolio mixes in use are put together by the advisors. Once that’s out of the way you give them money (usually pre authorized withdrawal or bill payment) and they invest it automatically. They also take care of the rebalancing.
In Comparison To DIY
The difference between DIY and an on-demand advice service is that you aren’t the one initiating the buys and sells. Automation takes care of that for you. It also takes care of the rebalancing. Despite things being automated the advisor is still available if you have questions, want to make changes, or have financial things in your life to discuss. This is why it’s light. Instead of an advisor actively reaching out to you yearly the burden is on you to reach out instead.
It’s also important to note that these companies don’t hold your investments. They rely on a custodian and simply enact actions according to your portfolio.
After looking at the various options currently available in Canada, talking to them, and having interactions with their people I ended up going with a company called Wealthsimple. I liked the passion I saw from their team, thought their fees were good, and liked how simple they made things. This was even reinforced more later during my advisor (or Wealth Concierge) call and a customer service interaction.
At the time when I signed up for Wealthsimple they had no method on your cellphone to do the sign up using their app. I used the website instead. This didn’t mean it was any more hard though. I filled out my personal information, filled out some information to determine my risk score, and provided my banking information. Wealthsimple deposited a small amount into my bank account which I paid back to them using bill payment. Once this was done I made my first contribution using the bill payment method again and once received had my call with an advisor. We discussed my financial strategy, when I would need the funds, that sort of thing. This was just to confirm that the risk score the form had determined was correct (and it was). After that the sign up process was done. The next day my contribution was automatically invested into ETFs.
Frictionless Low Cost Investing
Wealthsimple lives up to their name in making it simple. You can set up a pre-authorized contribution which is withdrawn from your bank account at an interval you specify or you can contribute yourself using the bill payment method. In the pre-authorized contribution method you literally have to do nothing but sit back and watch. Everything will take care of itself. This is what I wanted without paying the high fees of advisor mutual funds.
When I signed up I set up a preauthorized contribution for both my RRSP and TFSA. The RRSP one was set for the 15th (or nearest business day). Due to when I signed up this PAC was set up some time after the 15th. Days later the custodian Wealthsimple uses attempted to do the RRSP withdrawal, triggering an NSF fee as the account did not have the funds in it (since I didn’t expect it to occur until the next month). This was unexpected and concerning. I reached out to Wealthsimple and their customer service person offered to reimburse me for the NSF fee and investigate what had happened. This experience was extremely positive and completely sold me on Wealthsimple.
If you want to look in and see how things are going Wealthsimple provides a very simple portal. You can see what your holdings are and how they are doing and you can request limited changes but you can’t initiate portfolio changes.
Wealthsimple also provides a mobile application which provides a look at things when you are on the go.
Nothing is free, including the DIY option. Everything has an MER as previously mentioned and in the case of the on-demand advice services an additional advisory fee. So how do things play out in reality?
The following list is for a $50,000 starting balance assuming no contributions throughout the year. A growth portfolio has been used. The fee is how much would be charged for the year. MERs are approximate.
- Index ETFs - 0.19% MER - $95.09
- Index Mutual Funds - 0.70% MER - $351.23
- Wealthsimple - 0.75% MER - $373.83
- Mutual Funds (Low fee) - 1.07% MER - $537.89
- Mutual Funds (Medium fee) - 1.70% MER - $857.35
- Mutual Funds (High fee) - 2.60% MER - $1317.35
The difference between high fee mutual funds and DIY is enormous here: $1222.26. Even the difference between the high fee mutual funds and Wealthsimple is large at $943.52.
The following list is for a $50,000 starting balance assuming a monthly $1000 contribution throughout a year. A growth portfolio has been used. The fee is how much would be charged for the year. MERs are approximate.
- Index ETFs (No trading fees) - 0.19% MER - $105.37
- Index ETFs - 0.19% MER - $105.37 + $477.60 (trade fees, 4 trades per month at a rate of $9.95 each) = $582.97
- Index ETFS + Mutual Funds - 0.19% MER + 0.70% MER - $105.37 + $39.80 (trade fees, 4 trades at end of year) + $38.40 (mutual fund management fee) = $183.57
- Index Mutual Funds - 0.70% MER - $387.37
- Wealthsimple - 0.75% MER - $414.96
- Mutual Funds (Low fee) - 1.07% MER - $591.22
- Mutual Funds (Medium fee) - 1.70% MER - $936.89
- Mutual Funds (High fee) - 2.60% MER - $1427.61
Yet again the difference between the high fee mutual funds and DIY (using an ETF + mutual funds approach) remains high at $1244.04 while the difference between high fee mutual funds and Wealthsimple has increased to $1012.65. Some trading companies also offer free ETF purchases (but charge for selling). If you use one of these the difference between the high fee mutual funds and the index ETFs is a staggering $1322.241
Disclaimer: The above fees may not be exact but are a good judge of the difference between the different options and the cost. In the case of Wealthsimple a blended MER has been used with their fee and the MER of the underlying ETFs.
As you can see traditional mutual funds are at the top, DIY is at the bottom, and Wealthsimple sits in the middle. This is what I’d expect based on the current market we have here in Canada.
In The End
Personally I’ve chosen to go with Wealthsimple. I feel that the value I get from how simple they make it and having an advisor available is worth it. Is it for everyone though? No. I think those who can stay on top of it and enjoy the DIY method should embrace that. I do, however, think that more people should look at what the advisor mutual funds are giving them and ask themselves “is the money I’m paying actually worth it?”. If the answer is “no” things should be re-evaluated and the other options given serious consideration.
If you are interested in giving Wealthsimple a try feel free to use my referral link which provides free management of $10k of assets for 2 years.
This post was updated on July 29th, 2015 to include a no purchase fee ETF option in the fees list. ↩