A young professional who reads this newsletter got in touch recently to ask about moving a $25,000 mutual fund investment at a bank to a lower-cost robo-adviser.
The management expense ratio for the mutual fund is about 2 per cent, while the comparable cost from the robo-adviser would be about 0.6 per cent. No details were provided on the performance of the fund and how it compares to the benchmark stock and bond indexes the robo-adviser would invest in via low-fee exchange-traded funds. But justifying an extra 1.4 percentage points in fees with consistent outperformance is tough to do. What else does the bank offer to keep our young professional from moving to a cheaper option?
“The main argument I have received against the switch is that an investment adviser from a big bank can offer ‘further customer service and advice in changing times, and around big life decisions,’” this person wrote. “What is a specific situation in which a human adviser from a big bank could demonstrate their value over a robo-adviser?”
In theory, a bank adviser would know all about a client’s finances and be able to offer recommendations on debt, investing, saving, taxes and more. But let’s get real. The main mission of a big bank’s advisers is to sell bank products like high-fee mutual funds, not provide advice that puts clients first.
Mutual funds are a lucrative product for banks because of those high MERs. But keeping costs low is one of the best and easiest things you can do as an investor to position yourself for success.
Robo-advisers offer low-fee investments, and there are people to talk to if you have questions. They seem a better deal for a young person investing $25,000.
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Rob’s personal finance reading list
The high cost of home heating
Is your monthly natural gas bill based on actual meter readings, or estimates of your usage? The importance of this question can be seen in a CBC report about a couple who were charged more than $1,600 after their gas utility checked their actual usage and found it to be much higher than previously estimated costs. Make sure your gas utility has an actual meter reading at least a few times a year. Now, for a discussion of the costs of warming your home with baseboard electric heaters. Here in Ottawa, where I live, there are quite a few houses and condos with baseboard heating, which means heaters at floor level in each room. Here’s a Reddit thread where a renter with baseboard heating asks for advice on dealing with a hydro bill of $360 for two months. Heating with gas would cost roughly half that, at most. Note that baseboard heating differs from electric heat pumps, an efficient and environmentally friendly way to heat and cool a home.
Better than budgeting
Budgeting can be a big help in getting people to understand and contain their spending, but there’s another approach to keeping your finances on track. Read here to find out how it works. In short, you use automated transfers to route money from each paycheque into savings and investments. What’s left is yours to spend to the last cent.
How to ruin a relationship
A list of five “financial deal-breakers” for people in a relationship. A lot of this comes down to not hiding things – purchases, debt and so on.
Reader comment: A recent newsletter looked at how mutual funds are losing market share to exchange-traded funds in a big way. ETFs have a big advantage through their lower fees, a point that a reader took issue with. “It seems that making a comparison of ETFs and mutual funds seems incomplete without also pointing out that the best choice of investments is not solely based on cost. Ultimately, performance net of costs should be the motivation for choosing an investment portfolio. Why not tell the whole story?” Want to know one of the best predictors of future performance? It’s low fees, not past returns. Low fees don’t ensure good results, of course. But fees do drag down returns. Pay less, keep more for yourself. I wrote a book with that title a while back.
Do you have a question or comment for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools, explainers, guides and charts
It’s early for tax-filing, given that you probably haven’t received many T slips from bank and investment firms yet. But if you’re already on the case, here’s a list of the best free tax software packages.
The Money-Free Zone
The indie band Luna recently covered the great Lou Reed song Satellite of Love. Here’s the original Reed version, with backing vocals from David Bowie.
On social media
Personal finance expert Ramit Sethi posts on X about the system he uses for spending windfall money, say a bonus or a tax refund.
In case you missed these Globe and Mail personal finance-related stories
- Charting retirement: What happened to all the 50-year-olds?
- Air Canada seeks to quash regulator’s decision on passenger compensation in court
- How do the new advanced life deferred annuities fit into retirement income planning?
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Why millennials and Gen Z are Alberta-bound for a more affordable life • Rising interest rates brought pain for new homeowners – and opportunity for house hunters • Why more Canadians are choosing to be child-free or delay parenthood • Love in the time of inflation: How to manage rising costs when dating • You’re not bad at money – you’re suffering from money shame • Retirement might look different for Gen Z and millennials. Here’s how to plan for it • Recession-beating tips for the job market, housing, investing and the cost of life • Is the middle class dead for millennials and Gen Z?
- ✔️ The housing file: A house isn’t special. Get your head straight about the reality of home ownership • The good, the sad and the unaffordable: Saving for a home down payment in Canada’s big cities • Property taxes are popping in some cities – how worried should you be about other tax hikes? • Our other real-estate problem – people have too much wealth tied up in houses • Borrowers and savers, here’s how to time the eventual rollback of interest rates
- 📈 Investing: Canada's top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer's guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle
Rob Carrick