Tag Archives: robe-advisors

How high investment fees can diminish Investment Returns

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By Chris Ambridge, Transcend

Special to the Financial Independence Hub

The objective for most investors is to earn value-added performance. Unfortunately there are fees and other costs that can diminish investment returns. The reality is that the costs associated with investing in these products can lead to underperformance when measured against industry standard benchmarks.

The above chart shows the average annual fees and their impact on investment performance for Equity Mutual Funds, Exchange Traded Funds (ETFs), robo-advisors and Transcend’s Pay-for-Performance™ model. This is illustrated by comparing their returns against a benchmark. The benchmark is a universally accepted representation of a particular stock market that is used to measure the performance of a portfolio manager.  For example, a benchmark for Canadian equities is the S&P/TSX and a benchmark for U.S. equities is the S&P 500.

Ultimately, excessive fees reduce clients’ investment performance and hampers their ability to reach their financial goals.

While ETFs and robo-advisors are gaining in popularity, mutual funds are still the prevalent investment product for retail investors despite numerous studies that have confirmed the weak investment returns of equity mutual funds relative to their benchmarks. In Canada, a fairly new approach developed by S&P Dow Jones Indices called the SPIVA Canada Scorecard confirms performance failings. The latest result based upon five years of data ending December 2016 confirms that equity mutual funds have underperformed their benchmark, often because fees have such a negative impact on the overall portfolio results.

Mutual funds can charge management fees as well as administrative costs and custodial fees. They can also charge clients for trading, legal, audit and other operational expenses. In the chart above, these fees plus investment related underperformance add up to the average true cost (-2.37%) of investing during the last five years for equity mutual funds.

Even low-cost ETFs, which are designed to mirror a benchmark, tend to disappoint. The performance lag can be tied to the level of fees of 0.32%, plus trading and rebalancing costs as well as a potential cash balancing drag of up to 0.42%, based on 2015 data from the Management Reports of Fund Performance (MRFP) found on the SEDAR.ca website. This analysis does not include the negative impact of brokerage costs to buy and sell, and potential custodian or registration fees. With that in mind, the chart reveals that ETF investors underperform the market appropriate benchmark by -0.74%.

Robo-advisors to the rescue?

Another relatively new entrant to the low cost investment marketplace is the robo-advisor. Employing several common assumptions such as an average portfolio size of $50,000 and trading costs of 0.2% per year, it can be determined that the average robo-advisor fee in Canada is 0.63%.

This cost shows that it is more efficient than traditional wealth management fees, but still lags behind the Pay-for-Performance™ model. While everyone is talking about robo-advisors, the true question should be about getting value for your money and how much fees can impact actual outcomes. Continue Reading…

Why aren’t robo-advisors being used by those who need them most?

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By Edward Kholodenko,  Questrade

Special to the Financial Independence Hub

Uber has quickly become the largest personal transportation company in the world, yet it  doesn’t own a single vehicle. That’s because there’s more to Uber than just hailing a ride from your phone. It’s providing more convenience at a lower price and in turn, transforming the transportation industry.

Substitute Uber for Amazon, Airbnb, or any other tech disruptor and a common theme emerges. On the road to becoming mainstream, applications that reduce cost and improve convenience are often first adopted by millennials and the tech-savvy. While the early adopters reap the many benefits of these innovations, those who hesitate are missing out.

Retirement challenge and the Robo-Revolution

When it comes to financial technology, there are certain populations that can no longer afford to be late adopters. Thanks to the innovation in the investment space, preparing for retirement has become easier than ever. Enter robo-advisors: an online wealth management service that provides diversified investing, much like a mutual fund, but at a much lower cost.

Given the current state of retirement savings in Canada, it’s apparent that this technology has great value to those willing to take the leap.

There is concern that 80 per cent of middle-income Canadians nearing retirement won’t have enough to support themselves. The average Canadian’s retirement savings of $71,000 will last only a few years, and, 50 per cent of Canadians are not confident they will have enough to retire comfortably.

Not only are Canadians saving far too little for their retirement, but also many can no longer depend on company pension plans to provide the income needed to stop working.  Our golden years are increasingly self-funded and investment decisions now fall on the shoulders of the individual. There’s a fantastic opportunity for new solutions in this space, and those willing to embrace a solution provided by fintech providers are reaping the reward.

Robo-advisors, in spite of the name, aren’t actually robots. Professional (human) portfolio managers handle all of the investments. In fact, there are two types of managed robo-advisor accounts: actively- and passively-managed:

Actively-managed advisors have a dedicated team of portfolio managers who select investments and adjust the portfolio to take advantage of market opportunities, all of this at a low cost. Passively-managed advisors typically invest according to set investment rules that only track the market.

These advisors use leading technology and proven strategies to provide a better investment experience at a lower cost to the consumer. And, by reinvesting the money you save in fees, individuals are able to increase their retirement savings and returns.

Robo-advisors are helping Canadians retire wealthier

Continue Reading…