The Investing Showdown: DIY Investing vs Robo-Advisors

We have another guest post on to the blog this week!  I’m excited to have Kyle Prevost here today to discuss his thoughts on investing the DIY route with a low-fee brokerage vs going the more hands-off robo-advisor route.

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But first…

THANK YOU!

We’ve been selected as a Finalist for this year’s Plutus Awards (like the Emmys for us little ole personal finance bloggers) in the Best Canadian Finance Content category! This is such an honour to us as we are sitting with such great company.

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Ok back to business.

Around here we like to focus on the mindset/emotional/psychological side of FIRE and how to lower your expenses and live a more meaningful life.  We created our 8 part Investing 101 Series way back when but haven’t really focused too much on the investment side since then (because honestly we feel the investing side is the easy part and has been written about all over the internet, it’s the saver mindset that’s hard). So when Kyle offered to chat about DIY vs Robo I thought woohoo yea let’s do it, this saves me one less topic to write about ha!  This is a question I like to talk about with my coaching clients so I’m more than happy to have Kyle on to dig into this topic for us.

Before handing it over to Kyle I wanted to provide a bit of an intro first.  Kyle is the co-owner of the website Million Dollar Journey, which started back in 2006 – wowza! – as well as the co-owner of the Canadian Financial Summit virtual event.  Kyle was teaching business and personal finance in small-town Manitoba and moved last year to Qatar to teach overseas.

For those who are not familiar with the Canadian Financial Summit, I’d highly recommend checking it out this year as it has ~25 of some of the top Canadian personal finance gurus in the space.  And it’s $free if you view the recordings within the first 24 hours! Last year’s impressive line up included Ed Rempel (love Ed), Kristy & Bryce from Millennial Revolution (love me some MR), Kevin McCarthy (creator of the TFSA), Rob Carrick from the Globe and Mail, Robb Engen from Boomer and Echo, Mark Seed from My Own Advisor, and my pals Tom Drake (Maple Money), Maria Smith (Handful of Thoughts), and Bob Lai (Tawcan).

Andddd I’m excited to announce that yours truly will be part of this years Canadian Financial Summit!  Woohoo!  We will be tackling the topic of “FIRE Family”.  I’m so embarrassed I had a total brain fart right in the middle of a sentence during the recording! Am I allowed to use the “mom brain” excuse?!? Oy… I guess it means “I’m relatable”?  Sure, let’s go with that.

This free event is taking place online September 23-25, 2021 so please mark your calendars and sign up!

Ok Kyle, the floor is yours!

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Passive Investing Tradeoffs: Canadian Discount Brokerages and ETFs vs Robo Advisors

The math is in.

Passive investing beats active investing over the long term.  You might read some mutual fund sales literature that suggests otherwise, but essentially every personal finance writer in Canada agrees that for the vast majority of people, a simple passive investing strategy will generate the best long-term results.

Where there is still some debate however, is whether the average Canadian would be best served by realizing the benefits of passive investing through opening an online discount brokerage account and using ETFs or by utilizing a completely hand’s off solution with one of Canada’s robo advisors.

A Quick Refresher on Passive vs Active

Before we dive into the pool of specific companies and fund names, it’s likely worth taking a second to review just what would make an investment “active” or “passive”.

The key consideration is: Does the company/person controlling an investment believe that they possess the ability to pick certain assets (such as stocks, bonds, real estate, etc) that will consistently deliver higher returns than the average?

If the answer is yes – then the company/person is very very likely to be wrong – and the investment would be “active”.  Most high-priced mutual funds in Canada fit into this category.

If the answer is no – I’m satisfied with being exactly average, then the investment would be passive.

Passive investment products seek to “own the whole” market – and consequently deliver returns that are the mathematical average.  These products then focus on cutting costs to the bone.

For example, if you wanted to passively invest in Canada’s largest corporations, you would look for a fund that tracks the TSX60 (the 60 biggest stocks on the Toronto Stock Exchange).  A passive investment of the TSX 60 would take $100 of your money and split it up amongst those 60 companies according to how big they are.  That means that:

• $6.40 would go to buy a piece of RBC
• $5.96 would go to buy a piece of Shopify
• $5.75 would go to buy a piece of TD
• $4.02 would to to buy a piece of Canadian National Railway
• $3.60 would to go buy a piece of Enbridge

… and so on until your whole $100 was split up amongst the 60 Canadian giants.

At the end of each day, the fund would see how each company’s shares did, and re-adjust the ETF so that you are mathematically guaranteed to watch your money grow at exactly the average rate of Canada’s largest companies.  No “picking winners” or paying for high-priced Bay Street/Wall Street stock people to buy their next yacht.

Underneath the Hood of Three Passive Investment Vehicles

While you definitely want to travel down the low-free passive indexing highway on your journey to financial independence, the real question that you have to answer for yourself is what type of vehicle you want to ride in along the way.

All three vehicles run on the same fuel – exchange traded funds (ETFs).

ETFs come in all shapes and sizes, but passive investors only use the ones that have no active management, and track a large index such as the TSX60 or the S&P500.  There are useful ETFs for bonds, and less useful ETFs for all varieties of other assets.

The best thing about passively-invested ETFs are that they are super cheap, and they easily invest your money into hundreds – or even thousands – of companies in a quick and efficient way.

The Robo Advisor Easy-Rider has your name on it if you’re looking for the absolute quickest way to get started in investing, or if you want the most simple way to turn your pay cheque into a passively-invested portfolio.

Each robo advisor in Canada has a few unique characteristics, but the basic idea is that when you first sign up you’ll answer some introduction questions.  These answers will determine what risk-adjusted portfolio is the best fit for you.  Based on those answers (and any subsequent follow up communication you have with the robo advisor’s staff) your money will be used to purchase a few passive ETFs.  You might be allocated one ETF for Canada’s stocks, another ETF for USA stocks, a third ETF for all the other stocks in the world, and a final ETF for bonds.

The real headline here is you don’t even have to know how to spell “ETF” in order to make use of a robo advisor.  You can sign up in a matter of minutes, trust in the powers of index investing, hook up an automatic deposit from your bank account the day after payday, and then think about more important things!

Sure, if you want to check how your investments are doing, or ask any questions about stuff like RRSPs, TFSAs, and RESPs – the robo advisors and their excellent online/app platforms can hook you up – but the main benefit is just how easy it all is.

You get all that ease and help for the price of 0.4% to 0.8% of your investment each year (depending on your choice of robo advisor and how much money you have invested).  That percentage is usually referred to a Management Expense Ratio (MER).  When you use a robo advisor, you have to pay the robo advisor’s MER, plus the MER of the underlying ETFs that they use.

The All-in-One-ETF Hybrid Model is built for folks who don’t mind putting in a couple of hours-worth of reading up front, in order to save some money down the line – but they don’t want to be bothered with the rebalancing math that will be required every few months.

The all-in-one ETF is basically a robo advisor portfolio without the rest of the robo advisor package.  You don’t get the advice or the fancy tech platforms.

Instead, you have to:

1) Open an online discount brokerage account.

2) Decide on your investment risk tolerance.

3) Use your risk tolerance to choose a specific All-in-One ETF.

4) Just rinse-and-repeat by wiring money from your chequing account to your discount brokerage account each month, and simply rebuying the same ETF over and over again.

You’re going to pay a fair chunk less driving this baby than you would if you went with the robo advisor – but it’s still a bit more than if you purchased your own portfolio of ETFs.  You’re looking at an MER of .15% to .27% for this simple solution.

The Sleekly-Fuel Efficient Low-Fee Model is perfect for the detail-oriented optimizers out there.

This is the absolute cheapest way to passively invest – but you’ll have to give a little when it comes to doing some of your own research and some re-balancing periodic math.

There is nothing secret about ETFs you should own in order to get excellent portfolio exposure.  You can simply copy the exact ETFs that are owned by the robo advisors and all-in-one ETFs.  If you’re willing to do your own portfolio rebalancing by selling whichever ETF has done well, and buying more of whichever ETF has not, then you can shave a few more MER points and get maximum mileage.  The bill on his strategy comes in at .10% to .20% MER.

There is even a Canadian company called Passiv that will help you rebalance if you choose to go this route (future post coming shortly about reblanacing/Passiv).

Comparing MERs on $10,000

If you want the ease of a robo advisor, combined with the extra help that they offer, it’s going to set you back $40-$80 per $10,000 each year.

That number drops to $15-$27 per $10,000 if you open your own discount brokerage account and purchase all-in-one ETFs.

Finally, if you opt to use your discount brokerage to purchase and rebalance multiple ETFs, you’re likely to pay about $10-$20 per $10,000.

The ranges here depend on the balance of stocks to bonds that wish to have in your portfolio.

So What’s Best for You?

It’s all about trade-offs.

I don’t know how much value you personally put on convenience, or saving a few hundred bucks in investment fees each year – so how can I know what would fit you best?

I will say this much… Ten years ago when I started recommending index investing through handling your own ETF portfolio, the vast majority of my friends would look at me with glazed-over eyes.  They might’ve believed me, and they might’ve sort of understood the math, but they just never took action.  It was too many steps.  There was a little too much fractions-related calculation when it came to rebalancing every few months.

I personally still stick to building my own passive investing portfolio and cutting fees to the bone – but I think there is a ton of merit to choosing whichever one of these three passive investment vehicles that will motivate you to save the most.  The real takeaway you should have after reading this article is to simply pick a ride and start driving ASAP!

 

Kyle Prevost is a financial educator who writes at MillionDollarJourney.ca and has taught personal finance to high school students for over a decade.  When not on his soapbox at the front of a classroom, you can find Kyle on a basketball court or in a boxing ring trying to recapture something he likely never had in the first place.

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Thank you again Kyle for coming on to discuss this topic!  Hope you all enjoyed it and found it valuable.  I love how Kyle came up with the car analogy for these three investment routes.

Here are some of our key takeaways I want to point out:

• For those new to the investing game, the most important factor is to START.  Don’t let analysis paralysis hold you back for months or years (gasp!).  Likely, the easiest way to jump in is with a robo advisor.  You can always change to a DIY type of brokerage once you feel more comfortable.  You will pay a slightly higher fee to go this route initially but it is no where near the 2.5% fees that most actively managed advisors charge.  This is a great entry way into taking control of your finances.
• Once you have a good grasp on some terminology and your risk tolerance, you may feel more comfortable taking control of the wheels.  You can then shave off the extra MER from the robo advisor and instead go the DIY all-in-one fund route which is essentially the same thing as what the robo advisors are doing with just a little more elbow grease from your end.
• For most people, either one of these routes above are more than enough and sufficient to be a happy low-fee passive investor.
• If you want to further optimize/tweak your portfolio you could then select anywhere from 2-5 ETFs (anything more than that is excessive in my books) to really hone in your asset allocation and tax optimization.  This is really mainly for those who understand what they are looking for (via lots of reading/listening to blogs/books/podcasts/YouTube videos and building up that brain power in the personal finance space). If this doesn’t interest you, no sweat, stick with either the robo advisor or an all-in-one ETF. Some combinations for Canadians could be:
  • VEQT + VUN (+VAB)
  • XAW + VCN (+VAB)
• The biggest thing is to invest early and often.  Compound interest will ride you to the FI world over time.  Focus more on your savings rate and actually having money to invest.  Reaching your first $100,000 invested is likely the hardest part of the journey and the bulk of that will come from your contributions as compound interest plays it’s magic over time.  The investing side really does not have to be that complicated.  It’s having the money to invest that’s hard.
• Thanks to increasing competition, the low fee ETF route is definitely the way to go when it comes to investing.  Deciding on which of the 3 routes above to go totally depends on you and your comfort level.

Any follow up questions for Kyle?

And again, don’t forget to sign up for the free Canadian Finance Summit!  Looking forward to seeing you there 🙂

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• Investing Newbies: Check out our free Investing 101 Series
• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile and see how we are paying $3 / mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and / or tenant insurance.

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