The article “Where to Get Good Investment Advice Even if You Don’t Have a Lot of Capital” was originally published on The Financial Post on October 23, 2015.
All Canadians are looking for good investment advice and now, more than ever before, there is a wide divide between the bad and the good.
The gap is most prevalent for young Canadians, who have less experience, more modest savings and limited investment options, but also higher stakes: The earlier you start down the right or wrong path, the greater the compounding effect on your investments over time.
Unlike some other goods or services, getting quality investment advice doesn’t always mean going with the most expensive option available. My experience has been that new investors with small sums to invest often end up in expensive options recommended by salespeople who are not well-versed in financial and investment planning in the first place. Unfortunately, better advice may be reserved for those with more to invest.
New investors tend to start off with bank savings accounts that turn into bank mutual funds and it may be some time before they discover or even qualify for any alternatives. More established investors may broaden their horizons somewhat, but that does not necessarily lead to better investment results.
There are actually more investment options and products available today than ever before, but for many investors, this may result in worse investment advice. Not all people in the investment industry are licensed to sell or even talk about all the options and even those who are may be motivated by conflicts of interest leading to the wrong advice. Given the lack of a fiduciary standard in Canada, there is no guarantee that you will get advice that is in your best interest from even those who have access to the whole gamut of Canadian investment options.
Canadian investors have long used mutual funds as their investment vehicle of choice. Young investors with not much to invest are especially likely to end up in a mutual fund investment solution if they talk to someone at their bank. Financial advisers at banks are often licensed to sell only mutual funds offered by their bank, so do not expect to hear about other mutual funds, let alone stocks, bonds or exchange-traded funds.
According to the Investment Company Institute, approximately one-quarter of Canadian financial wealth is invested in mutual funds. BMO reports that about three-quarters of Canadian RRSPs include mutual fund investments. So it is not a matter of mutual funds being reserved for only the young, novice investor — they really are a prime investment vehicle for Canadians.
The problem is that Canada’s average mutual fund fees rank amongst the highest in the world: A Morningstar report from earlier this year gave Canadian mutual funds a “D minus” grade on fees — the worst of the 25 countries that were evaluated.
For a more local perspective, average asset-weighted mutual fund fees in Canada are almost 150 per cent higher than U.S. mutual funds — 1.93 per cent vs. 0.79 per cent — as reported by the Canadian Securities Administrators.
So, if mutual funds are a black hole for Canadian savers, what can you do? I think it bears pointing out that mutual funds cannot all be painted with the same brush. There are always exceptions to the rule.
Tangerine — formerly ING and now a subsidiary of Scotiabank — has four simple mutual funds with varying levels of risk and fees almost half that of the average Canadian mutual fund, clocking in at only 1.07 per cent. There is no minimum investment, making Tangerine a good option for young people without much capital.
Vancouver-based Steadyhand offers six mutual funds with fees ranging from 0.65 per cent to 1.78 per cent. Their fees are even reduced as much as 54 per cent depending on how much you invest with them and how long you have been a client. They enable retail investors to access investment managers who otherwise have seven figure minimum investment requirements. Steadyhand’s minimum investment is $10,000 per fund, making them attainable as millennials begin to build a bit of a nest egg.
For those investors who would rather match a stock index’s return rather than trying to outperform, passive investment funds like TD’s e-Series funds aim to help investors do just that. The TD Canadian Index Fund has fees of only 0.33 per cent.
TD e-Series mutual funds have only a $100 minimum investment. Some discount brokerages allow investors to buy exchange-traded funds without incurring any transaction costs, meaning ETFs are also a viable option for millennials. Horizons even lowered its Horizons S&P/TSX 60 Index ETF fee to 0.03 per cent last month until at least the end of next September.
But do-it-yourself investing is not for everyone. And that is why young people who cannot otherwise build their own DIY portfolio have options like robo-advisers to consider. These firms build and manage ETF portfolios for clients. There are eight such options currently, with fees ranging from one-quarter of one per cent to three-quarters of one per cent. WealthSimple and WealthBar are notable for the fact that accounts of less than $5,000 attract no fees other than the fees on the underlying investments, which are less than one-quarter of one per cent.
Suffice to say there are a few shining stars in the night for young Canadians with small investment accounts. They will no doubt continue to put pressure on higher cost and less practical products that have had little competition in Canada’s highly inefficient market.
While visiting a local bank branch might seem like an obvious first-step in a search for financial advice, Canadian millennials would be wise to consider low-cost wholesale mutual fund companies, robo-advisers and DIY ETF portfolios. Each of these services offer ways to increase an investor’s odds of higher investment returns, at the expense of the traditional, bloated, expensive investment strategies of yesteryear. They might just be able to teach their parents a thing or two if they do.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.