While the bulk of Canadians’ portfolios are still invested using the traditional advisor-plus-mutual fund combination, fee-conscious investors are gravitating towards online brokers and robo advisors at an accelerating pace.
The decoupling of commission-based investment products and investment advice is an excellent step forward for the industry and Canadian investors. The movement away from traditional mutual fund models has led to two primary paths for DIY investors in Canada.
1) Purchasing your own stocks, bonds, ETFs, and other investments through an online brokerage account.
2) Using a robo advisor to automatically purchase a pre-defined portfolio (usually consisting of stocks and bonds).
Both paths offer several improvements on the traditional way Canadians used to handle their investments, but there are some key differences. To make matters even more confusing, several companies offer both types of platforms, so it can be easy to get mixed up if you are relatively new to the DIY investing scene.
Fees
Traditional Canadian mutual funds charge investors two to three per cent each year. While this might not sound like a lot, it really adds up in a hurry. Investing with an online broker can include a small annual percentage such as .20 per cent (10 times less!) if you use ETFs, but individual stocks have no annual fee.
Robo-advisors on the other hand usually charge about .40 per cent, plus the ETFs that they use charge about another .20 per cent. While more expensive than the fully-DIY brokerage route, it’s still roughly a quarter of what Canadians pay in mutual fund fees.
Financial advice
Some of Canada’s leading online brokerages such as Qtrade and Questrade provide very good educational resources. You can learn more about them by reading our Qtrade review. That said, it’s still up to you to find your own information and make your own choices. By choosing the solo DIY route, you’re essentially saying, “Thanks, but no thanks” to paid financial advice.
Canada’s robo-advisors are a bit harder to define when it comes to what financial advice they provide. All of the robos offer some type of advice – usually through a convenient online chat or email reply – but just what that will cover varies from company to company. In my experience, robo advisors can generally provide advice on generic questions such as, “Should I invest in a TFSA or RRSP this year,” but would struggle to give advice on something more complicated such as setting up a trust to pass wealth along to children.
Performance
Strangely enough, the first question most new investors want to ask about when they compare traditional mutual funds to DIY investing or robo-portfolios, is the least relevant question: What has the return been – or how have the investments done?
Any financial guru worth their balance sheet will tell you that these categories are much too broad to answer a question like that with any degree of accuracy. To get a more nuanced answer to your question, I recommend reading a bit more on active vs passive investing. In other words, it’s not what type of platform you use to invest that determines your results, but rather the investment philosophy of the person controlling the platform.
(Spoiler Alert: The active investing + high fees approach taken by most mutual funds is almost always a bad idea.)
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com.
