Looking for respite from the pervasive sense of gloom about investment returns in the years to come?
Try a robo-adviser. On average, eight of Canada's robo-advisers are suggesting investors expect an annualized after-fee return of 5.9 per cent from a balanced portfolio. The average for conservative portfolios is expected to be 4.3 per cent, while aggressive portfolios are expected to deliver 7.2 per cent. These figures were collected as part of the fact-finding that went into the compilation of the second annual Globe and Mail Robo-Adviser Guide. Each of the 11 firms included in the survey was asked to provide return expectations. Eight supplied this information.
Robos are too new to have generated a meaningful track record of investment returns. But we can at least look at what these firms believe to be achievable by building portfolios primarily with low-cost exchange-traded funds. Expectations vary a fair bit between firms, but the averages reflect a degree of optimism about what's ahead.
We're hearing a lot these days about how we should temper our expectations for returns in the years to come. One reason is an aging demographic in many countries that will constrain economic growth and, in turn, corporate profits. On the bond side, interest rates are expected to remain low. The latest guidelines for financial planners published by the Financial Planning Standards Council and Institut québécois de planification financière project an after-fee return of 3.3 per cent for a conservative portfolio, 3.94 per cent for a balance portfolio and 4.8 per cent for an aggressive portfolio. The portfolio mixes used here are slightly different from those in the projections supplied by robo-advisers – this may account for a bit of the discrepancy in overall returns.
But the key differential appears to be fees. The FPSC guidelines use fees of 1.25 per cent, which are probably low when you consider the cost of mutual funds and even fee-based advice using cheaper ETFs. Expect robo-advisers, with ETF and advice fees combined, to start at 0.7 per cent to 0.75 per cent and then decline as your portfolio gets further into the six-digit range.
I think robo-advisers are a bit overly optimistic about returns, but I invite them to prove me wrong. Meantime, clients should expect results in line with those of the major stock and bond indexes, minus fees for ETFs and advice. Returns of 4 per cent to 5 per cent for a balanced portfolio seem reasonable.