**Today’s guest post comes from my friend Kyle Prevost over at MillionDollarJourney.com. He’s am editor and writer, in addition to being a personal finance education expert.
When my friends used to ask me about how to get started in investing, I used to recommend the online discount broker + ETF(s) route. It’s still the lowest-cost way to build the index investing portfolio that we all know and love.
The math was correct – but the value proposition was wrong.
What many young Canadians want is the simplest way possible to invest their money – without paying the crippling fees that mutual funds charge. If an investing platform is easily accessible online, and offers a transparent easy-to-understand investing strategy, that’s even better.
When robo advisors came out, I started to experiment with recommending this new method of indexing investing. To be honest, I felt kind of guilty about it because I hate recommending products that I don’t personally use. Being an investing nerd, I still prefer to cut my costs to the bone using my discount brokerage account. You can check out my Questrade review for the details on how I essentially invest for free using their no-cost ETF purchases.
But most people aren’t investing nerds. So, the question becomes – at what point does going the DIY route make sense for you?
A breakdown of robo advisor fees
When you invest with a robo advisor, you are essentially paying two levels of fees. (Sometimes, this is obvious, other times not so much.)
1) The fees that the robo advisor will charge for their services – usually in the neighbourhood of .3%-.6% of your entire portfolio.
2) The fees that the underlying ETFs that the robo advisor uses charge for their product – usually about .2% for a balanced portfolio and is referred to as a Management Expense Ratio (MER)
This means that for every $10,000 that you invest with a robo advisor, you will pay $30-$60 in fees each year to the robo company, and then another $20 to the ETF creators.
A breakdown of discount brokerage fees
If you want a complete look at fees and features, check out the complete Canadian online broker comparison that we put together over at Million Dollar Journey.
Some Canadian discount brokerages charge a per-trade fee for all stocks and ETFs. Others allow you to trade for free, but have very limited platforms.
I like to split the difference and look for all-option discount brokers that allow me to purchase ETFs for free. I won’t need to sell ETFs for several years when it comes to portfolio rebalancing, as simply reinvesting dividends and using my monthly contributions will be more than enough to get my portfolio’s asset allocation back to where it should be.
I make sure that I avoid inactivity fees, and if you select the right broker, there are no annual account fees either. This all adds up to my total investing costs basically being the MER of the ETFs themselves – so about $20 for every $10,000 invested.
Reasons to choose a robo advisor over DIY w/ a discount brokerage
- You can create a completely automated solution to your investment dilemma in 15 minutes. Money goes from paycheque-to-diversified-portfolio each month on autopilot, and that’s incredibly valuable because there is no delay in implementing the strategy.
- You get help determining your initial risk tolerance and subsequent asset allocation.
- You have access to personalized help from a Portfolio Manager (someone legally mandated to give you advice that puts your needs first – amazingly this is not the norm for financial advisors across the country).
- You may want to use them for a specific reason such as for your children’s RESP.
- Aesthetically-pleasing platforms that communicate a lot of information at a glance.
When should I change from a robo advisor to a Discount broker?
Answer: Maybe Never
If the simplicity of the robo advisor solution keeps you focused on just systematically adding to your index portfolio with every cheque, then it might never be worth the cost savings to change. It’s not good to overthink a good thing!
In the interest of making the tradeoffs crystal clear for everyone though, let’s take a look at the math involved at different portfolio levels. Here’s a comparison of the annual fees that you would pay as your nest egg grew over the years.
|Portfolio Size||Robo Advisor + ETFs||Discount Broker + ETFs|
It’s entirely possible that the tradeoff for convenience and advice makes sense for you when it only costs a hundred bucks more each year, but not when that difference is $1,500+.
It should also be mentioned that as your portfolio grows in value, most robo advisors charge a smaller percentage of the pie. Consequently, the relevant amount of fees that you’d pay if you used a robo advisor would be closer to the smaller end of that range as you move down the table above.
The bottom line is that there is no one-size-fits-all answer when it comes to making this tradeoff. The underlying investment returns should be very similar to one another, so my rule of thumb would simply be to choose the option that motivates you to save the most. If convenience gives you the juice to live life, plus you find some reassurance in the fact that there is someone there to answer questions – then don’t worry about the extra fees and go with a robo advisor. If the knowledge that you are wringing every last low-cost drop from that lemon to make your portfolio lemonade encourages you to save a little more each month, then go with the discount broker.