Weekend Reading: Why Benchmarking Matters Edition
A client recently came to me with an investment problem. It turns out she had two.
She was currently investing with mom & dad’s guy, at a well established firm that tends to invest actively in stocks and mutual funds.
Her portfolio had plenty of red flags. Overlapping mutual funds (how many Canadian dividend funds does one need?) layered with blue chip US and Canadian stocks, all for the classic 2% embedded fees. Even worse, there was a large non-registered investment account balance even though she still had TFSA room. In fact, her TFSA wasn’t even held there, she was investing it on her own (another problem I’ll get to in a minute) and still had $40,000 of contribution room available.
She heard about how high fees can take a huge bite out of your investment returns over long periods of time. Furthermore, mom & dad’s guy wasn’t really giving her the time of day (no service). She wanted to move the RRSP and non-registered investments to Wealthsimple and invest in an asset allocation ETF to save the fees and take more control of her investments. Makes sense.
Meanwhile, the TFSA she was managing on her own was filled with individual stocks on the advice of a friend who works in finance. She initially wanted to leave that one alone because it was “doing really well”. Hmm.
I took a look at both portfolios and honestly more red flags went up for the self-managed portfolio. There were 48 individual positions for a $100,000 account. The monthly statement was 33 pages long. It looked more like a day trading account than anything. Not ideal in your TFSA, where excess trading can draw the ire of the CRA.
Even worse were the returns. At least the old school fund manager was keeping up with the market, minus their 2% fee. The self-managed TFSA? Its returns lagged by 5% on average over the past 3.5 years.
We hear all the time, assets under management (AUM) fees are bad and will destroy your returns over the long term. And, while true, you also need to compare your own investing decisions to an appropriate benchmark to determine if your judgement and decisions are adding any value whatsoever versus just buying a global index fund.
In this case, her goal was to leave her active fund manager to save the 1.8% fee difference between what she had and what a global asset allocation ETF would charge.
But at the same time she wanted to continue trading in another account that had actually been trailing the benchmark index by 5% per year.
Not only that, how much time and effort went into those 48 stock picks (and all of the other previous picks over the years, and all of the future picks over the years) to just get absolutely walloped by a single, do nothing index fund?
The account that she thought was doing really well showed annual returns of 14%. Not bad. But when a global index fund returned 19% over the same time period for no effort at all, it should raise eyebrows (and questions).
I urge you all, whether investing with a fund manager or investing on your own, to compare your returns to a risk appropriate asset allocation ETF (RBC Select Balanced fund to VBAL, the Select Growth fund to VGRO, etc.).
For actively managed funds, enter the fund name + Morningstar to see how the fund has performed alongside its benchmark index and its competitors. If it looks like the image below, start asking questions:
Proper benchmarking is incredibly important. It’s not enough for your advisor to say he or she has delivered double-digit returns over the past three years. Ask to compare that to an appropriate benchmark index fund. Are you (or they) adding any value over simply holding the market portfolio with a low cost index fund?
This Week’s Recap:
I had the pleasure of attending the IAFP Symposium in Winnipeg this past week. All of the top planners in the country attend – the ones who want to raise the bar for financial advice and the financial planning profession, and who aim to put clients’ interests first every single time.
And what a treat to hear The Wealthy Barber David Chilton speak at the event on Thursday night. Dave is retiring at the end of the year, and told some wonderful stories about the early days publishing his transformative book, his involvement with the wildly successful Looneyspoons cookbooks, and his eventful time on Dragon’s Den.
I’ve also had some time to reflect on our own business and where Lindsay and I want to see things go in the future. The business has grown by ~50% a year since we started and we’re at a point now where we don’t have the capacity to do any more.
This is the time where many entrepreneurs would expand, hire another planner and more admin support. But we value our little lifestyle practice and are going to take a different approach.
Instead of expanding, we are intentionally contracting – capping the number of new clients we take on each month to maintain our high quality but also give us some breathing room to enjoy our lives outside of work.
No more discovery calls – instead we’ll have interested clients follow the “fast track” process for Lindsay to determine if they’re a good fit to move forward.
We’ll continue working with our “regular Canadians with regular problems” niche, and refer others out to a network of trusted advice-only planners.
Weekend Reading:
Wage stagnation, inflation and sheer bad luck have left Gen Xers toiling into old age. Will they ever get to call it quits?
Daniel Crosby on the psychology of decumulation and why the hardest part of retirement isn’t running out of money, it’s letting go of the rules that made you wealthy.
The normal retirement age is rising in many developed countries. How long can Canada cling to 65?
If you name a successor holder, your TFSA can continue growing tax-free long after you’re gone.
You may be surprised how much RRIF income increases your tax bill after age 71. Here are some ways to control the damage.
Ben Felix on when compounding works against you, and how to fund your real “why”:
Similarly, Nick Maggiulli shares his thoughts on living poor to die rich:
“It’s giving up current consumption to give up future consumption. It’s living poor to die rich. I don’t mean poor financially. People sitting on lots of unrealized gains are undeniably wealthy. I mean poor in the sense that money you’ll never spend isn’t really your money.”
Financial planner Russell Sawatsky is retiring this year and shares his thoughts on approaching retirement.
A Wealth of Common Sense blogger Ben Carlson explains how high stock market concentration isn’t necessarily a cause for panic.
Gambling culture is shaping retail investor behaviour. Here’s what advisors should do about it.
Finally, the world of youth sports has become an expensive whirlwind of private coaches, high-stakes competitions and constant practice.
Have a great weekend, everyone!
Another great article!
How would you approach coaching your significant other to leave “their investing guy” ?
My wife is in the same boat and is paying north of 1.5 MER for sub par returns.
Everytime I bring it up her walls come up and she gets defensive. I’m just trying to get her into Wealthsimple also and something with lower fees and good returns such as an ETF like ZGRO/ZEQT or VGRO/VEQT.
Thanks,
Adam
With my spouse I mentioned the ability to retire earlier, do more stuff with and for the kids and more travel. That’s what lower MERs would enable. Sold itself.
Using the money =Time principle can be very effective for those who are loath to investigate lower cost and more effective/efficient options or to save for the future.
It was the only way to get through to a high wage earner 39 yr old who was feeling burnt out by her job and couldn’t see working past 50 yet wasn’t investing/saving for her future.
You could broach the idea of talking with a fee only financial adviser. When my partner and I disagreed with what to do with some excess cash we did a session with the new school of finance and they were able to show him the different options for the cash in a way he was receptive to. Ultimately we split the difference and did half what I preferred and half what he preferred (which was half toward mortgage and half save for a business idea). We both left feeling heard and satisfied.
Education is the key, but sometimes spousal information can be received as attempts to be pushy/controlling; just like teaching your spouse to drive.
You might want to suggest a few books which may get her thinking…
– Beat The Bank
– The Millionaire Teacher
– Reboot Your Portfolio
Hi Rob,
Great article on using Benchmarks. For years I have tried to find the actual fees my stock and ETF cost me in $$ numbers in my self directed TFSA and RRSP at WS. However I have not successfully found it. Do these online platforms not publish it ? I know the MER % however $$ is what I am looking for. Are these platforms not required to publish these numbers ?
Thanks,
Monica
TCR/CRM 3.0 will result in fees bring reported in dollars and not %, and should enlighten a lot of folks as embedded fees also have to be reported. I believe the first statements under this will be Jan.2027.
Thank you Sam.
A quick google search brought this : https://dynamic.ca/content/dam/docs/regulatory/crm/tcr-crm3-faq-en.pdf
I like this statement: You’ll also see
a new table showing Fund Expense Ratios (FERs), which include any trailing
commissions paid to dealers based on the fund series or class.
FER is a new term showing total embedded product costs. It combines the
Management Expense Ratio (MER) and Trading Expense Ratio (TER).
I have been with TD Direct Investing for decades. They publish very accurate returns using the exact same method that portfolio managers use. You can easily compare how your portfolio is doing against various indices. Although TD charges $9.99 for stock trades, you can buy Vanguard Asset Allocation ETFs at no charge which is a real bonus. Plus TD Direct Investing has the absolute best research of any discount brokerage as well as having huge inventory of individual bonds and GIC’s. While they are not perfect, they will remain my broker of choice for the foreseeable future. I just wish they would drop their commissions on individual stocks and all ETFs to zero like Bank of Montreal, Wealthsimple, and Questrade.
Does TD direct investing charge on top of MER,?
TD Direct Investing is a discount brokerage; a trading platform. When a fund charges an MER, you pay that through the fund; the MER is deducted from your return. TD Direct Investing does not add a fee on top of the MER as they are not managing your money.
Great article Robb, and I appreciate the links for further reading as well.
Congratulations on the decision you and Lindsey have made to hold steady and contract the business. As someone who has been unfortunate enough to experience several losses close to me in recent years, I truly believe ‘health is wealth’ and you must find joy in everyday life.
Thanks for what you have done for us in a professional capacity but also thanks for what you share here. I learn something every time I come to your blog.
So appreciate your approach to ‘intentionally contracting’ your practice, you practice what you preach and it’s clear you value your time outside the business as much as helping everyday Canadians. Thank you for being honest and authentic!
You always help inspire me to work through why I own a business and how much we should expand .
I always have to think – “what’s enough?”
I hope you and Lindsay find a productive middle ground!
Thanks for blazing the trail and doing what’s right for you, instead of the usual trope (hire, expand, etc).
Congrats on the success of your business. Love to hear your approach to choosing what works for your life, it’s rare to see. Also quite relieved that you still have time for existing clients like me. 🙂
Great article Robb. I am glad you and Lindsay have to decided to stay small, limit your client base, and enjoy your life. You practice what you preach. I feel very lucky to count myself as a client. I think the idea of cancelling the “Discovery Call” is brilliant. If people don’t know who you are already, they haven’t done their homework.
I hope we can remain a client for years to come.
Hi Robb: Thank you for the insights you provide to Canadians on key financial topics. I have learnt quite a bit from your articles and blogs.
On this particular topic of benchmarking, I have found fundlibrary.com very useful in comparing funds & etfs and wanted to share this info.
Would be great to receive any comments/feedback.