The financial services industry would have you believe that individual investors don’t want to pay upfront for investment advice – in fact, the industry claims that investors prefer to pay for financial advice through fees that are part of their mutual funds.

But we all know that mutual funds in Canada cost too much and the relationship between investors and financial advisors is mostly transactional in nature. Embedded commissions and trailer fees might make sense for investors who are just starting out, but over the long term this conflict of interest will be expensive and lead to poorer outcomes for investors.

An unconventional pairing

With the relatively new arrival of fee-only financial planners – advisors who don’t sell products but offer unbiased and objective financial advice for a set fee – and the emergence of robo-advisors – online investment management services – there is an opportunity for Canadians to access a better form of financial advice that costs less than the traditional bank advisor-mutual fund model.

That’s right, pairing a fee-only financial advisor with a robo-advisor (or DIY, if that’s your thing) can actually save you money and lead to better investor outcomes.

Here’s an example using a 40-year old living in Ontario with various levels of assets. We’ll say the fee-only advisor will cost $1,000 in the first year and then $500 per year for ongoing advice. We’ll use the Canadian Online Investment Options – Fee Calculator to plug in a few scenarios:

An investor with $50,000 today, who contributes $500 to his or her account monthly, will pay roughly $375 in fees with a robo-advisor and $1,000 for a financial plan – total cost of $1,375. The bank mutual funds (embedded commissions that you never see, yet come off your returns whether you make money or not) will cost $1,131 in year one.

In year two, the investor now has $56,000 and will pay $423 in fees with a robo-advisor and $500 for ongoing financial advice with a fee-only planner – total cost of $923. The bank mutual funds will cost $1,266 in year two.

The tandem of fee-only planner and robo-advisor cost our investor a total of $2,300 in two years. Staying with the bank advisor-mutual fund model for two years cost our investor $2,400.

A two-year breakeven point for young investors without a lot of assets is pretty reasonable when you consider the impact of this decision over the long term. As assets go up, the difference in fees becomes much more pronounced.

Assume our investor now has $250,000 in his or her RRSP. The least expensive robo-advisor at this level would cost $1,418 per year. Add the cost of a financial plan at $1,000 and you have total fees of $2,418 in year one.

Would you believe that is less than half the cost of staying with the bank advisor-mutual fund model? Brace yourself. A $250,000 bank mutual fund portfolio would cost $5,655 per year in fees!

What can a robo-advisor do for me?

Now I know what you’re thinking. What do I need a robo-advisor for when I can just invest on my own? Consider this:

In his best-selling book, Thinking, Fast and Slow, professor and Nobel prize winning author Daniel Kahneman suggests that better decisions arise when we rely on automated information systems. He says, “hostility to algorithms will probably soften as their role in everyday life continues to expand”.

Numerous studies show that individual investors vastly underperform investment benchmarks due to poor behaviour and cognitive bias (i.e. performance chasing, market timing, overconfidence). A rules-based, automated system such as those imposed by online investment services can keep your portfolio on track by keeping your emotions on the sidelines.

It’s like having an investment policy statement that you actually follow in the face of economic uncertainty and market turbulence.

“Statistical algorithms greatly outdo humans in noisy environments,” says Kahneman.

Final thoughts

It’s time for a different approach to the way we look for financial advice. The traditional model is rife with conflict, so while government and securities regulators continue to dither over reform, new options for investors have started to shift the landscape.

Forget all the nonsense about investors not wanting to pay upfront for advice. Consumers want to save money and make smarter decisions with their finances. A tandem approach that pairs an unbiased fee-only financial planner with a robo-advisor to handle our investments and keep our emotions at bay will not only cost less, but will lead to better outcomes for investors.

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6 Comments

  1. Grant on July 20, 2015 at 7:18 am

    Rob, this model may be unconventional now, but I think as time goes on it will become the norm because it is in the best interests of the investor. Not only for smaller accounts but for larger accounts, too. As Robo advisors become more sophisticated, offering features such as asset location and tax loss harvesting (as do US companies like Betterment and Wealthfront, this model will also work well with larger portfolios with multiple accounts. The current assets under management fee model, with fees of around 1% for assets of $1M and above, results in a large transfer of wealth, over time, from the investor to the manager.

    • Echo on July 20, 2015 at 9:35 am

      Hi Grant, yes as the technology gets better it will become even more sophisticated (and potentially cheaper). I guess the only danger lies in the fact that the biggest and best robo-advisors might get swallowed up by the big banks at some point.

  2. Devin on July 20, 2015 at 11:33 am

    There are actually further savings to be had as in contrast to how I understand robot-advisors work in the US some of the options in Canada will provide you with financial planning as well. If you have a very complicated circumstance they may not be the best, but I would guess for 90% of people what they do is sufficient. In particular Wealthbar has been very active in advertising their financial planning and I had an initial planning session with them and it was professional and well done. That would cut fees to well below 1% including financial planning.

  3. Paul N on July 21, 2015 at 10:31 am

    “Shareowner” is another player in the pool of these type of services as well, and has been around for quite some time… (1987)

  4. Joe S. on March 7, 2016 at 11:51 am

    The fee-only financial planner and robo investment advisor pairing may be unconventional, but it has worked very well for our family over the last 2-3 years.

    Kathryn M. of Money Coaches Canada fostered a revolution in our decision making surrounding money which lead to not only becoming debt free in short order, but establishing a firm retirement plan. Wealth Simple was a great investing middle ground for my wife and I (I wanted to DYI, she was worried about the mechanics of that as our portfolio grew), and I really can’t say enough about Wealth Simple!

    To me, the two are a perfect match.

  5. Steve Bridge on July 13, 2016 at 6:11 pm

    Thank you very much for publishing this article!

    I am advocating for the very same thing- of course I may be ‘biased’ being a fee-only money coach with Money Coaches Canada, but I see first hand how Canadians benefit from this pairing. No one is trying to sell them anything and as a coach, I have only their best interests at heart. It’s a win-win for people – more money in their pocket in the long run and unbiased professional advice!

    Steve Bridge
    North Vancouver, BC

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