Tag Archives: robo-advisers

Doing the math on investment fees: the math isn’t pretty

Posted By |

A few weeks ago I invited readers to share their portfolio details with me so I could help ‘do the math’ on their investment fees. Many of you did, and the results weren’t pretty. From accounts loaded with deferred sales charges (DSCs), management expense ratios (MERs) in the high 2 per cent range, and funds overlapping the same sectors and regions, it was a predictable mess of over-priced products.

The worst of the bunch: the number of portfolios filled with segregated funds.

I’ve highlighted segregated funds as the biggest offender when it comes to fees for two reasons:

1.) The MER on segregated funds are higher than most mutual funds (which we know are already high enough). I looked at one portfolio that held a suite of segregated funds from Industrial Alliance called Ecoflex, with MERs of 2.99, 3.26, and 3.29 per cent;

2.) Segregated funds were exempt from CRM2 disclosure rules because they are considered insurance products. Investors receive the fund facts sheet, which still express fees in percentage terms rather than breaking them down and disclosing in dollar terms.

Doing the math on your investment fees

 

Keep in mind most readers were looking for me to do the math on their investment fees for portfolios valued at $250,000 or more. One reader, a soon-to-be retiree, had an average MER of 3.13 per cent for his $412,000 portfolio.

I told him he paid nearly $13,000 in investment fees last year and asked if he thought he was getting good value for his fees. He said he hadn’t met with his advisor in three years, despite repeated attempts to get together to discuss his retirement plan.

Another reader held $300,000 in high-fee mutual funds with Investors Group. She recognized the fees, but was on the fence about switching because she was in the middle of the deferred sales charge schedule:  a penalty that would cost her $10,000 if she sold the funds and transferred to a robo-advisor. Continue Reading…

My journey to Passive Index Investing, Part 2

Posted By |

By Dr. Networth

Special to the Financial Independence Hub

After reading My Journey to Passive Index Investing – Part 1, you may think that I have it in for financial advisors.  I don’t.   I believe the majority of financial advisors truly want to help their clients, but either their hands are tied or they have misguided beliefs.

The way financial advice compensation is structured creates a situation which, unfortunately, benefits the financial industry more than the individual investor.   There are also some financial advisors who truly believe active management beats out passive index investing over the long-term, despite high commissions/MERs and strong evidence which says otherwise.  Stay away from these financial advisors, since they have “drank the Kool-Aid.”

I believe a financial advisor with a CFP designation should have a fiduciary responsibility to create a comprehensive financial plan.  This includes insurance, estate planning, portfolio management (using low-cost ETFs/funds), as well as “holding your hand” during the inevitable market corrections.

Is advice worth 1 or 2% in fees?

How much is that worth?   This is a difficult question to answer. I don’t think it is worth the typical 1-2% in fees, which most banks and financial firms charge, especially if you have a large portfolio.  With the implementation of “Robo-advisors” and financial advisors that charge flat-fee or hourly-based (not tied to commissions on products), consumers are now beginning to have more choice for financial advice at a lower cost.

As you may recall, Part 1 ended with me as a newbie staff physician  in 2009 with little financial knowledge and an idea planted in my mind to “check out ETFs.”

It wasn’t until 2010 when I came across an article in the Globe and Mail, by Rob Carrick, where he rated the best personal finance blogs of 2010.  One of the blogs caught my eye: “Canadian Couch Potato,” written by Dan Bortolotti, which has been the best resource for index investing in Canada.

 

Through CCP, I came across another Canadian personal finance blogger by the name of Andrew Hallam, and his book “Millionaire Teacher.  The Nine Rules of Wealth You Should have Learned in School“, which was  originally published in 2011 (updated in 2017).

Hallam’s book is worth the price of admission,  since he has read a ton of personal finance/investing books, and has summarized succinctly in his book.  If you still have doubts whether passive investing beats active investing over the long-term those doubts will be put to rest after reading Chapter 3.   Physicians practice evidence-based medicine, because research backs it up.  The same concept should apply when it comes to investing. The enormous amount of evidence in favour of passive investing is, in my opinion, equivalent to a “Grade A” recommendation in evidence-based medicine. 

I have read my fair share of excellent finance books/blogs, but everything that you need to know about personal finances and index investing in Canada can be essentially found in these two resources.   If you read Hallam’s book and CCP’s blog (in particular his “Model Portfolios“), then you will:

  • Know more than the majority of financial advisors out there

  • Understand that the #1 determinant of your long-term investment returns is your asset allocation (% stocks: % bonds)

  • Understand that the #2 determinant of your long-term investment returns is to keep fees/MERs low by using low-cost index ETFs/funds, which will outperform the majority of actively-managed funds

  • Understand how to manage your own portfolio with low cost ETFs with minimal effort/time  

If you spend a bit of your time with these two resources, then you will eventually be able to save 1-2% MER each year by managing your own portfolio. 1-2% savings on a $1 million dollar portfolio will be $10,000-$20,000 per year, every year, for the rest of your life. That is a considerable amount of money which can be used on your family instead, such as taking 1 or 2 nice family vacation trips per year. For the equivalent amount, how many hours would you need to work at your job?

Once everything has been set up, you only require 30 minutes per month to manage this portfolio.  It really isn’t that difficult, as Loonie Doctor explains. However, taking that first step to managing your portfolio can be frightening and may fill you with self-doubt.   Comparable to a medical student learning a new procedure/skill – “See one, do one, teach one”.  These 2 resources will help you with the “See one” part.  At some point, you will need to take the plunge.   Follow that with sharing your knowledge with others, and you will become an “expert” in DIY passive index investing.

Analysis Paralysis

A point I would like to mention is the “law of diminishing returns” when it comes to learning about index investing.   After a certain point, any additional time spent learning about the nuances of index investing will probably not result in better returns, and may in fact, cause analysis paralysis: Continue Reading…

Even more rookie mistakes that seasoned investors make

Posted By |

By Neville Joanes

(Sponsor Content)

Even though we all “knew it was coming” the precise timing of the market correction this month caught quite a few seasoned investors by surprise. Hey, it happens. No one can predict where the stocks go all the time. But how did you respond? Did you sell along with the herd — and lock in your losses? Or did you see this as a buying opportunity? How were you prepared for it in the first place?

Even the most experienced investors can get caught short in times like these. Recognize your investing biases that can lead to bad decision-making — and learn from them. Here are a few more that we didn’t cover last time. (See 3 rookie mistakes that seasoned investors still make.)

Confusing the familiar with the safe

Disney, Coca Cola and Starbucks are big brands. But are they safe, or even good investments — by virtue of their size?

Just a few years ago, you might have gotten the same feeling of rock-solid reliability about Nortel, Blockbuster or Kodak. Or Sears. Pan Am airlines. Netscape. Pets.com Or hundreds of other companies with billions in their war chests …  that aren’t even around today. By last year, just 60 companies remained from the original Fortune 500 list.

Investors have inherited the illusion of stability and power from size, possibly from our origins in hunting wooly mammoths with wooden spears. The big guys are hard to take down (we think). So even experienced investors will throw their money at blue-chip stocks and other institutional-style investments. It’s a half-baked hedging strategy.

When you have this bias, you don’t do the proper due diligence you would with other investments. Why look too closely, when the trading megafauna like Amazon or Apple just keep bounding onward and upward? Because the bigger they are, the harder they fall.

A big-name brand is not necessarily a bad bet. This is where a strategy of diversification comes in. By planting seeds in a range of investments instead of a single big-name brand, you’re in safer territory. Continue Reading…

3 rookie mistakes that seasoned investors still make

Posted By |

By Neville Joanes

(Sponsor Content)

We’ve all been enjoying the bull market. But getting a historically respectable 6 per cent return, or even doubling it, can feel underwhelming when the economy is roaring ahead and the Nasdaq has gone up 30 per cent.  From what I see, the difference between the big winners and the also-ran-investors often comes down to whether or not they let their biases cloud their judgement. Even experienced investors are not immune.

It’s such a big problem that an entire field of study has sprouted out of this: behavioral economics. Economist Richard Thaler won a Nobel prize for his work looking at how these biases operate among humans in a supposedly rational market.

Here’s a roundup of the worst mistakes I see again and again from DIY investors (which is why a lot of these people would be better off with a set-it-and-forget-it strategy).

Running with the herd

If you want an above-average return, then don’t rush into what the crowd is doing.

Probably the most outrageous example of this mistake is to be found in the irrational exuberance over Bitcoin. Just $1,000 worth of Bitcoin from a few years ago would be over $1 million today. If you threw caution to the wind and invested in this years ago, then you have certainly seen the kind of ROI that Wall Street hedge fund managers can only dream of. But all those gains are in the past, to the benefit of the early adopters.

The vast majority of investors have arrived late to this party. Most of the large gains have already been captured. And while there may be more growth yet to come, experts say that Bitcoin eventually seems destined to repeat its bust cycles of 2011 and 2014. The herd is about to race off a cliff. Usually, by the time your neighbor next door is jumping on the bandwagon, it’s already past time to get off.

Recency bias

We all know that past performance is no guarantee of future returns. And yet, it is basically human nature to ignore that knowledge.

In life, recency bias is actually a useful rule of thumb a lot of the time. Your friend who always shows up late will show up late again. The restaurant you liked years ago, but whose quality keeps declining will continue to suck, in new and intolerable ways.

For investing, recency bias can really do harm. We see a line graph showing a steadily-rising return, like with the Nasdaq: well, why wouldn’t that trend continue? Because it can’t. Over time, as an asset rises in value, we can expect it to fall back down to the mean.

Continue Reading…

Why “Topping up to bracket” makes sense if you’re temporarily in a low tax bracket

Posted By |

My latest column in Wednesday’s Globe & Mail looks at a strategy called “Topping up to Bracket,” which can be useful to anyone who is temporarily in a lower tax bracket.

Click on the highlighted headline to access the online version, assuming you have Globe subscriber privileges or haven’t exceeded the monthly free click quota: A strong tax case for early RRSP withdrawals.

When might you be “temporarily” in a lower tax bracket than usual? This can of course happen when you lose a job or if you’re in your Sixties and transitioning between full employment (typically earning in higher tax brackets) and Semi-Retirement, when it’s tempting to “bask” in lower tax brackets.

Temporary because as Semi-Retirement progresses, you can end up moving back into higher tax brackets: for example, if you start to receive Old Age Security (OAS) at 65, then take Canada Pension Plan (CPP) a few years later, these are both taxable sources of income.

And the big hit can come at the end of the year you turn 71, when RRSPs must be converted to Registered Retirement Income Funds (RRIFs) or else annualized or cashed out. RRIFs entail forced annual withdrawal rates that keep rising between your 70s and your mid 90s.

So that makes “Topping up to Bracket” (a term used in a BMO Wealth Institute paper on the topic, published around 2013) a strategy not to be ignored. In practice it means making sure that in those low-earning years you at least bring into your hands each and every year the roughly $12,000 of untaxed earnings that’s called the Basic Personal Amount (BPA). And as the G&M column explains, it’s also a good idea to at least bring in the dollars that are in the lowest tax bracket (15% federally, 5% in Ontario), or roughly $42,000. There are of course higher tax brackets above that but the law of diminishing returns starts to kick in beyond the $42,000.

Note too that this is a “use it or lose it” proposition. If for example a year went by that you failed even to bring in even that $12,000 income that would not have been taxed, you can’t carry forward the opportunity to benefit from it the following year. You will of course have another opportunity for the BPA that year but it won’t double up because you neglected to earn low- or non-taxed income the previous year. Continue Reading…