Low-fee and personalized ETF Portfolios

Low-free and personalized ETF Portfolios

Investing is simple but it can be very hard at times.

For one, all investors are constantly encouraged to take the long-term view.  Focusing on what might happen 10, 20, or 30 years from now is not easy.  You’ll need some major financial discipline to stick to a solid plan.  Heck, you’ll need a solid plan in the first place.  Two, beyond the financial plan there is the execution and monitoring of what you’ve put in place.  There is the delicate re-balancing act across all various asset classes.  And I’m just scratching the surface of what you need know and do as a Do-It-Yourself (DIY) investor.

I know what’s involved.  I am a DIY investor – I’ve chosen this path purposely.  This doesn’t mean things are always easy.  Besides, like most things in life, knowing what you should do and actually doing it are two different things.  Bad (investing) behaviour happens – and I fight it sometimes.

Thanks to the FinTech revolution there are now some great low-fee and hassle-free ways to invest – that do not require the same level of effort some DIY investors take on or fight themselves on.  There can be beauty in simplicity. This means for most Canadians a diversified, low-cost portfolio made up of various Exchange Traded Funds (ETFs) can serve your financial future very well.

ModernAdvisor is one of Canada’s leading FinTech firms and a proud partner of this site.  Since the launch of their company, ModernAdvisor has offered cost-effective ways to build and rebalance portfolios.  They even offer you free money to try out their approach!

While their menu of broad range standard portfolios works well for many investors, they often come across clients with special circumstances, including higher-net worth needs.  

Enter Custom Portfolios.

With ModernAdvisor Custom Portfolios you can now take a more holistic view of your financial situation – to design and get low-cost help to manage your personalized portfolio.  This portfolio will take into account all your asset classes, wherever they are held, including real estate. This service is now available at no additional cost to clients who invest $150,000 or more with ModernAdvisor.  Here’s what Navid Boostani, co-Founder and CEO highlighted to me about this low-cost, advisor supported approach:

“Traditionally, the level of service offered with our Custom Portfolios would cost more than 1% per year, and would often require a much higher account balance. Now you can get a customized portfolio for an annual fee of 0.40% or less, which is unprecedented in Canada.”

So, how does this low-cost Custom Portfolio work?  I took a test drive myself to see what my portfolio could look like and how it compares to my DIY investing approach.  

Step 1 – What do you have?  (Nice to meet you)

Navid directed me to a link on his site – to answer a few questions and schedule a brief meeting with one of his advisors.  (Note:  at the time of this post there are three advisors on the team; they have either a chartered financial analyst (CFA) and/or chartered investment manager (CIM) designation).

Here are some of the questions I answered to help my advisor get a good picture of our financial situation:

• What are our existing investment holdings and assets?  What accounts do we own the assets in?  What is the market value and cost base of those investments?
• What are our real estate assets?  Who owns the property or properties?  What is the market value and cost base of those properties?
• In taxable accounts, do we have any capital losses or carryovers?  
• What is the contribution room left in our taxable accounts?
• And more…

Through the question and answer session it was clear this wasn’t just about what I had saved and what I wanted to invest, it was a dissection of everything we owned and didn’t yet own (including our home).   I was told this assessment was important for many reasons, one of them being to minimize taxes by allocating the appropriate funds to our registered and non-registered accounts.  

Step 2 – What do you need? (Save me from me)

Following the asset tally, there was then a discussion about the bigger picture.  What is my money for?  What are my goals?  Why do we want to invest at all?  What are my investing preferences (or biases)?  This part of the interview was done to learn more about me, the investor, what makes me tick; not just about what my wife and I had accumulated to date.  I know why they do this.  They want to help save me from me (from my bad investing behavior).

Step 3 – Putting it together (Draft Portfolio)

By analyzing what I have and also what I need – out comes a draft portfolio.  I was actually surprised by the results.

Here is what my custom portfolio looks like (modified risk level 8):

This is not how I invest today.

I own a few dozen Canadian and U.S. dividend paying stocks.  I also own a few low-cost Exchange Traded Funds (ETFs) for worldwide diversification – although different ones from those above.  The draft portfolio definitely suggested a different path for me.  Without hesitation Navid responded to some questions I had about this, with some good answers to consider.

Me:  Navid, I don’t hold any bonds in my portfolio.  I consider (rightly or wrongly) my defined benefit pension plan at work as a “big bond”.  Because of this fixed (future) income and I take on more equity risk in my personal portfolio during my asset accumulation years – as in now.  I get the VSB (Vanguard Canadian Short-Term Bond ETF) allocation but I was especially interested in the international (EM) bond allocation you designed for me.  I’ve always read domestic bonds are better suited for you since you avoid currency risk with fixed income this way?

Navid:  I agree you can view your pension plan as a fixed income investment however one thing to keep in mind about any pension plan is the risk of default.  Some have minimal default risk (government plans), and others have much higher risk (think Nortel).  The creditworthiness of the plan sponsor should also be taken into account when considering pension plans as a part of your retirement plan.  That said our custom portfolios can be tailored to investors like you who have a defined benefit or defined contribution pension plan.

The emerging market bonds in our portfolios are all USD denominated sovereign bonds.  They are hedged to Canadian dollars, so practically there is no currency risk.  These bonds are expected to outperform local/U.S. bonds by a wide margin over the next 10 years given where interest rates are today (as in very low).

Me:  Emerging market bonds aside, this was actually more bonds than I would have though Navid.  Maybe that’s because of my bias to dividend stocks and equity ETFs?  I was also surprised how much lower the % of Canadian equity (probably) should be in my portfolio.  I guess I have a bit of a home country bias.

Navid:  Most investors do Mark (have a home country bias).  This is where we believe global diversification can help you (and most investors) in the long-run.  Also, back to bonds, the higher allocation to bonds than what you might have expected is partly due to low long-term return expectations for equities. Research Affiliates (RA) does some great work in this area. Take a quick look at their long-term expectations for different asset classes here for you and your readers.  Keep in mind their expectations are for a U.S. investor. We have adopted RA methodology for Canadian investors.

It was interesting to read those perspectives and advice.  It has me thinking maybe my portfolio is too stock heavy and I’ll need bonds at some point.  It also has me thinking I likely need more international assets as time goes on.  I could be missing out on international equity returns.  (I’m going to consider this.)  Re-visiting and challenging my investing assumptions is a good thing.  This is where I believe many robo-advisors like ModernAdvisor offer good value.

Value for money

To sum up – Custom Portfolios from ModernAdvisor offer investors a simple three-step process for building a simple low-cost but diversified portfolio – with the investors’ best interests in mind.  I’m not quite ready to give up on my own DIY approach but I certainly believe this offering can benefit many investors.  More specifically, this approach can provide holistic investment advice, investment tax optimization, automatic portfolio rebalancing, assets held in U.S. dollars if needed and much more.  At the end of the day you’ll certainly keep more of your hard earned money, and keep that money working for you; far better than pricey mutual fund alternatives.  Isn’t that a big part of the bottom line?

Image courtesy of ModernAdvisor.

As readers of My Own Advisor, Navid and his team have set-up a special offer.  

First, you still have an option to set-up a new investment account; low-cost and hassle-free investing over here with $1,000 of their money (free trial).  You can decide if you want to continue from there.  The preceding link will provide more details about that referral program.

There is normally a $500 setup fee for custom portfolios if you invest less than $150,000 with ModernAdvisor (the cost of putting together a robust plan for you).  Readers of My Own Advisor will receive a $150 discount on this setup fee.  All readers need to do is mention My Own Advisor (this blog) during the initial phone meeting and you’ll save money.  That’s it.  

Better investment solutions are out there – the choice is yours.