Before I let you read the rest of this post, I want us to agree on a set of facts:
- It is extremely rare (but not impossible) for any one investor, investment professional, or investment management company to consistently and reliably outperform the market for any appreciable length of time.
- The only way to profit from this legendary investor’s tactical brilliance is to begin investing with him or her very early on in his or her career, which necessitates identifying him or her before said brilliant career actually takes off in any appreciable way.
- If 1, then 2 is unlikely at best.
- If (almost) every investor, investment professional, or investment manager can only – at best – be expected to deliver long-term returns at about the same rate as the market in general, and only by sheerest luck (in most cases) will he or she happen to turn out to be of the rare breed mentioned in 1, then the only meaningful differentiation between everyone else is the amount of money it costs to invest with them.
4 a) The difference in cost to invest between any two investment professionals, since it must not have anything to do with investing acumen, must be explained by the amount of “other stuff” that professional does: (real) tax planning, (real) financial planning, (real) estate planning…you get the picture.
If we can’t agree on these basic points, then you should probably just find something better to do, because you’ll likely get outraged and/or defensive about what I’m going to say next:
Why on earth are Canadians still paying 2% for “investment management” when there is no (real) “other stuff” offered?
(But first, a word on the proper place that investments should hold in the grand scheme of things:
Your investment portfolio, however large or small, is a tool that exists to help you accomplish your goals whether you hope to buy a house, save for retirement, pay for some of your kids’ education, or move to a farm and grow your own food.
The investment decisions you make will have less impact on your ability to achieve those goals than the amount you discipline yourself to save, the speed with which you pay off debt, and the conscious, everyday choices you make in your spending. In fact, how you spend your money month-in and month-out is the single most important financial characteristic. By comparison, investing is a small piece of your life, yet it gets a disproportionate amount of attention from financial professionals, more than efficient dept repayment, more than goal planning, and far, far more than cash flow and budgeting.
So why is “investment advice” the first (and sometimes only) thing most of us think about when we think about financial planning?
The reason that such a little thing gets such big attention is because there’s money in it. Lots of money. “Wealth Management” is what pays the bills for banks, you know. That, and it’s a lot sexier to talk about than cutting back on your grocery bill or starting to save regularly for your next property tax installment.
Not a single word eof what you just read is news to you. If you’ve spent any time online, or read any of the good Canadian personal finance books out there, you know that what you’re supposed to do is open up one of the online brokerage accounts, buy the ETFs in the Global Couch Potato portfolio, set a reminder to rebalance once a year, and get on with your life.
The problem is this: Do-it-yourself asset management sounds intimidating, can be time-consuming, and tempts people who shouldn’t tinker to tinker. It isn’t for everyone, and for those who want to ask a question now and then, who want some hand-holding when it comes time to set up and start trading across TFSA, RRSP, and/or non registered accounts, or who just want someone else to do it, please, and let me get on with the things I do best…well…
You can go to a bank or a mutual fund company:
The first place most of us turn to when we start thinking about investing is the army of bank/insurance/mutual fund company advisors who – in the face of all the evidence – still believe that paying 2.3% in fees for their company’s mutual funds is somehow a more effective long-term investing strategy than 0.30% for index funds or passively managed ETFs. These advisors believe that the extra money tacked on to the investment management fees in the form of up-front and trailing commissions pays them to give you advice, and will fight you tooth and nail if you even mention indexing.
Their advice – however well-meaning – depends on the amount of training they’ve received from the institution that’s paying them to sell you their own line of products, by the amount of time they are required to spend chasing new clients and new money, and by the likelihood that they’ll stay in their job any reasonable length of time. Generally, if you want to re-balance your investments annually, you’ll need to call, set an appointment, dictate exactly what you want, and re-hash all the same arguments over index funds you had the first time.
The upside, of course, is that you don’t have to do it yourself, and every town has at least a few people willing to sit across the desk (or kitchen table) from you and take your money.
Okay, not the bank. How about a real asset manager:
For a real asset manager, one who doesn’t have regional sales targets to meet, who can craft and monitor a portfolio of securities not limited by a single institution, who know the specific goals, constraints, and strategies that you’re facing with said portfolio, and who will talk you down during times of market turmoil and rein you in when everyone else is losing their minds with greed, you generally need to have already saved between $250,000 and $500,000, and be willing to pay around 1% in annual fees, which should go down the more wealth there is to manage.
It’s a real “to him who has, much will be given” kind of scene.
These folks are harder to find, and not all of them are created equal. Some of them are in the game for the money, and some are in it for reasonable compensation. Believe me, there’s a difference, and there are many more of the former than the latter.
Oh. I don’t have that kind of money yet, and 1% still sounds kind of high.
Right between expensive non-advice and expensive real-but-hard-to-find advice is the implementation gap. Canadians who know something’s not right with the advice they’re getting at the bank, don’t have $500,000 accumulated, and know they’re not interested or disciplined enough to build and rebalance their own investment accounts are out of luck if they want a low-cost, passively managed, common-sense portfolio that they can throw money at and get on with their lives.
Enter the robo-advisor, or – more properly – the “advisor who doesn’t pretend to deliver on most of the ‘other stuff’ outside of their area of expertise – investments – and has much lower overhead than your traditional advisor and can therefore offer their services at a reasonable cost”. These are companies like WealthSimple, WealthBar, and Nest Wealth, who are (or are in the process of getting) licensed and regulated the same way that the banks and asset managers are, but who have slipped the bonds of brick and mortar and can set up and rebalance your portfolio of index ETFs for under 1% from the comfort of your own laptop. That’s a better deal than the rich folks are getting.
Some financial media types and many protectionist old-school investment managers invoke the spectre of “why would you let a computer program manage your money for you” whenever the topic comes up, which is probably why they’re hit with the robo-advisor label in the first place. None of the companies I mentioned above fit the fear-mongering description given in this article (as an exemplar of many similar articles, albeit American). Rather, these are investment management companies with real-life people ready to talk you through your asset-allocation, risk tolerance, tax-optimizing, and rebalancing decisions.
For most of us regular Canadians, the best thing we can do with our investments is set an asset allocation target that fits with our true ability to handle risk and our tax situation, get the fees as low as possible – which usually means index investing – and then close our eyes and throw money at them. Ideally we shouldn’t even have to rebalance at all, because every time we have the opportunity to benefit from rebalancing (selling a recent winner to buy a recent loser on the cheap) we also have the opportunity to Not Rebalance. Heck, I talk, write, and read about investing every day (see above), and I still had a hard time pushing the button to sell equities and buy fixed income this past spring.
If you let these not-robo-advisors do their job, your job would get very, very simple: make money and save some of it. No more trying to outwit the market because “interest rates are going to go up and I don’t want to be in bonds”…sometime in the past five and next five years. No more looking at how your equity mutual funds grew over 2013 and assuming that it was because of the amazing skill of the mutual fund salesperson you met with in 2012.
Invest like this, and your portfolio goes back to being a tool to help you accomplish the life you want, and shrinks in importance back to its proper place in the grand scheme of life, the universe, and everything.