More ETFs and SmartFolios for your portfolio

As customer expectations change, looks like the financial industry is trying to keep pace.  Recently TD Asset Management decided to launch its own suite of Exchange Traded Funds (ETFs).  This makes TD the third “big bank” player to provide its own suite of ETFs, following Royal Bank (RY) and Bank of Montreal (BMO).  I recall this is the second time TD has tried to launch its own suite of ETFs, the first time was a failure due to lagging growth – how times quickly change.

Also in the news BMO Wealth Management group is launching SmartFolio, a new personalized portfolio management service.  I suspect this initiative is in response to and to compete with other blended approaches to manage investor portfolios such as those provided by robo-advisors like Wealthsimple and Nest Wealth, among others.  You can check out my overview of Wealthsimple including my interview with CEO Michael Katchen here.  Staying with Wealthsimple for a moment, it recently acquired boomer-oriented ShareOwner.  ShareOwner has an established history of something I am fond of – they are best known for their dividend reinvestment plans for hundreds of Canadian and U.S. stocks.

You can certainly use synthetic dividend reinvestment plans (DRIPs) for stocks and ETFs with all the big bank brokerages but it looks like BMO’s SmartFolio is trying to carve out its own niche.

The rise of robo-advisors and “SmartFolios” is understandable.  Consumers are looking to take more ownership over their financial affairs but they don’t want to pay an arm and a leg to do it.  Investors are learning more and more that high money management fees over long periods of time kill portfolio values.  I came to this realization myself a few years ago.  I’ve already provided an overview of Wealthsimple operations so for today’s post I figured I’d provide an overview of SmartFolio and offer a take on this new service.

What is it?

Launched by BMO Nesbitt Burns Inc., the bank’s brokerage division, SmartFolio seeks to close the gap between the digital notifications and investment advice that occurs with adviceDirect today, and what consumers are asking for – a more hands-off but more affordable way to invest.

Who is the target audience?

This service seems directed at Canadian investors who are just starting out, with as little as $5,000 to invest.  BMO clients will have access to cost efficient ETFs (like ZCN, a low-cost leader in the Canadian equity fund space) and pre-constructed portfolios managed by BMO Asset Management experts.

Like other online robo-advisors and other discount brokerage services, SmartFolio requires clients to complete a risk questionnaire that will steer them to an appropriate mix of stocks and bonds.  A recommended portfolio is selected from there.  As a curious guy I took “the test” myself, a series of ten questions to see if my hybrid approach to investing using dividend paying stocks and indexed products was reflected in any of the pre-defined portfolios.  This was my result:  I was recommended an equity growth portfolio with 90% stocks and 10% fixed income allocation.

What is the cost?

During my interview with Wealthsimple, I was informed for a hypothetical portfolio comprised of a $50,000 RRSP and a $10,000 TFSA, for a couple in their 30s, the total cost per year for Wealthsimple services was $275.  That works out to a money management fee of about 0.5% annually.  Mr. Katchen has been poking at Canada’s big banks for some time, stating in an article “I challenge the big banks to join us in creating a new kind of platform that puts clients first, and avoids the high costs, low transparency and basic technology of their current offerings”.

Mr. Katchen got part of his wish with BMO’s SmartFolio – advisory costs are about 0.7% annually for the first $100,000 and lower costs are provided for larger accounts, as assets held increase.  The cost of the ETFs in your portfolio would be extra.

My take?

First, as I’ve learned over the years there’s always room to lower costs for investors but it seems clear to me over the last year big banks and other financial firms are listening to customers, acting on what they hear, and striving to meet their demands for digital, on-demand information, and more robust portfolio management.  This is a good thing.  Second, it also appears these firms are doing this to get ahead of upcoming requirements.  Coming this summer, new industry rules require investment firms to provide clients with detailed portfolio performance information.  Third, BMO is looking to increase their bottom-line, and I don’t blame them.  They are a big business after all and their goal is to make money for shareholders.  I am one of them.

In summary, with new regulations to be enforced and lower-cost solutions coming into effect, it looks like it’s a win for consumers going forward – investors have options – and if you’re not happy with your portfolio, your advisor or both, you’ve got some lower cost alternatives folks.

What’s your take on these new products and services?  Good or bad for the consumer?  Great news for bank shareholders?

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20 Responses to "More ETFs and SmartFolios for your portfolio"

  1. Good info Mark.
    I’ve had all of my accounts in Shareowners for many years. Being retired and not doing hardly any trading, but still reinvesting 60% of my dividends, the Full Dividend Reinvestment offered makes a huge difference. My sister has her accounts with RBC and with Synthetic drips, she’s always left with $20 to $30 per dividend paid sitting in the account.
    Sounds like good news for those who like Index investing with etf’s.

    Reply
    1. I think these changes are good overall for consumers but I can appreciate also, some investors are likely overwhelmed by the choices available to them – even more than before.

      Reply
  2. I think the new robo-advisors are great for people starting out or those with nominal portfolios but the fees can add up once your investments grow. Like most things it’s a question of cost vs perceived value.

    I found ShareOwner (and Nest Wealth) had the best models and the lowest fees – certainly the most suitable for larger portfolios.

    I decided that the DIY model buying Vanguard and BMO ETF’s was best for me. Had TD had ETF’s when I moved from their nominal value /high fee (1.48% MER) Strategic Managed Portfolio offering I may have bought those ETF’s.

    Reply
    1. I agree, I think the combination of digital services and lower-cost solutions (use of ETFs) will really help Millennials. I decided many years ago the DIY model is something I am a) passionate about and b) I wish to manage.

      I do think any managed portfolio over 1%-1.5% is getting a bit on the high side. They again, if paying 1.5% will prevent investors from making major money mistakes it’s all worth it. I certainly know I’ve made a number of dumbass financial moves. Thanks for reading Marko.

      Reply
  3. “Who is the target audience?

    This service seems directed at Canadian investors who are just starting out, with as little as $5,000 to invest.”

    Dead wrong.

    Portfolio vs Annual Advisor Fee
    $5,000 = 1.2%
    $100,000 = 0.7%
    $1,000,000 = 0.48%

    If it’s more difficult to manage larger sums of money (ask Buffett), then why is BMO charging less for larger accounts? The target audience is the wealthy. Painfully obvious business model of trying to rake in as much AUM as possible, as fast as possible.
    Yet another insight as to how the rich keep getting richer — they pay 150% less in money management fees.

    “Investors who are just starting out” would be well advised to stay away from this thing like the plague (or Zika). Competing robos offer much better deals.

    (Historical side note: as a younger man, I did a short internship with Nesbitt Burns…short because I left when it became apparent the job was much more used car salesman than financial advisor. Like all other industries, what you learn as an inside can be disturbing. I have a particularly negative bias towards BMO/NB.)

    Reply
    1. But that’s always the way isn’t it SST – you have the wealthy that get some “breaks” when it comes to fees since they have more assets to invest.

      I see your point – the little guy is getting shafted w.r.t. a higher proportion of fees/AUM; the little guy is just learning how to invest, what to invest in, and when.

      SST, what your background again? Are you an accountant or former financial professional? Sorry, I can’t recall if you told me 🙂
      Cheers,
      Mark

      Reply
      1. The math doesn’t make sense either. Let’s reverse the fee structure: 1.2% on $1M, 0.48% on $5k. Now they would be making $12,000 (vs $4,800) and $24 (vs $60). Since only ~1% of Canadians (290,000) have $1M+ in investable/financial assets, it’s a much smaller pool from which to draw. Let’s say BMO wanted to make $100,000 in fees, with the current scheme they would require 21 million dollar portfolios, or 1,666 $5,000 deposits. Under an inverse structure, they would need only 8 millionaires, or 4,166 low-ballers.

        If their intent is to actual grow the wealth of smaller initial investors over time, they would do better to increase fees as portfolio size increases. Or perhaps think future returns will not be producing million dollar portfolios, so they better get as many of them as possible right out of the gate.

        Compare the BMO advisor fee structure with the two other robos mentioned, Wealthsimple and Nest Wealth:

        $5,000
        BMO 1.2%
        WS 0%
        NW 4.8% (!!!)

        $100,000
        BMO 0.7%
        WS 0.48%
        NW 0.48%

        $1,000,000
        BMO 0.48%
        WS 0.34%
        NW 0.09%

        With Wealthsimple, a $15-$20,000 portfolio pays the same fees as a $1,000,000 portfolio; they have a bell shaped fee structure. Nest Wealth has kind of a sine wave structure, oscillating high and low between transition points until it drops off after $150,000 — $37.5k/$75k/$150k all 0.64% (one less dollar in all these ranges results in a 0.32% annual fee). BMO is the most expensive at every level, I doubt their products or services are that much more superior.

        As mentioned in one of your other posting, even the most expensive US robos are under 1% annual fees, all inclusive. I’m kinda disgusted with the ongoing state of expensive Canadian financial firms.

        My background…initially set out to be an independent advisor. Developed a profitable trading system in the 90’s, pursued a degree with a focus on physics (I was hypnotized! by technical analysis and people like Niederhoffer), realized it was useless to analyze bunk market data (creative accounting, anyone?), went to work for the almighty government, recently got my advisors license, spent a couple years in the biz to gain traction, realized the financial sector is the same old snake pit as it’s always been, left the company, currently (aka gradually) developing a client-centric business, as well as a very basic financial literacy course to run in conjunction with literacy organizations*. Nutshell-ish.

        *(48% of Canadians are at or below Level 2 readers (10 years ago it was 42%), defined as people who do not read well…over 10 million Canadians are working at marginal or modest levels of literacy. Keep this in mind next time you read that 60%+ of Canadians claim to be financially literate.)

        Reply
        1. “If their intent is to actual grow the wealth of smaller initial investors over time, they would do better to increase fees as portfolio size increases.”

          That of course cannot be true, right? Their goal is to maximize, ultimately, profit for the organization and shareholders. I am one of them.

          Interesting background…I LOL’ed when I read this: “I realized the financial sector is the same old snake pit as it’s always been, left the company, currently (aka gradually) developing a client-centric business”

          I’m tempted to do the same as I transition careers in a few years. I think getting my CFP would be good.

          That’s a scary stat about literacy SST, not the financial one either.

          Reply
          1. Careful Mark: Getting CFP may start you thinking like most of them, your already on the right track without spending a nickel to find out you are right.

        2. “Keep this in mind next time you read that 60%+ of Canadians claim to be financially literate.”

          Sadly, no thanks to our Canadian schools, I feel our Canadian financial literacy rate is less than 10%.

          Reply
  4. Robo-advisors might be ok for those starting out but I don’t understand why anyone with a large $ portfolio of indexed ETFs would offer up 0.50% annual expenses to manage their holdings. Indexing isn’t rocket science to manage, especially with a handful of positions. I feel the Robo service should be offered free for customers unless they can retool the software to manage individual stock holdings…example; a 30 stock dividend growth portfolio. This actually would be a nice option for those inclined to individual stocks but inexperienced in choosing their own and wanting to keep their fees low.

    Reply
    1. I think Robo-advisors are fine for many people, they will just have to get used to virtual support and avoid tinkering with their portfolio. Much easier said than done!

      If enough competition rises over this, I could see robo-advisor fees coming down over time.

      Reply
    2. @Bernie: Like Insurance companies, Robo’s are not in the business to loose money! If they offered a portion free, they’d pick it up elsewhere. Nice thing about no fees is no fees.

      Reply
  5. I have $270K in a conservative, managed portfolio, fee 1.5%.
    Eight years till retirement and not happy with my portfolio.
    Is it worth it for me to switch to WealthSimple or another similar “Robo Investor” at this time?

    Reply
    1. That fee seems a bit high Beth, given all the alternatives out there. What are you in particular not happy with?

      I posted an interview with the CEO of ModernAdvisor here recently:
      http://www.myownadvisor.ca/hassle-free-investing-modernadvisor/

      I also provided this overview of WealthSimple:
      http://www.myownadvisor.ca/wealthsimple-new-investing-service-launches-think-robo-advisor-north/

      I think both Robo-firms have lots to offer investors who don’t want to go the DIY route but also want more control over their portfolio, and of course, at a much lower cost.

      Hope that helps Beth.
      Mark

      Reply

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