When looking to invest your savings, whether it is a little or a lot, it is important to do your homework. As far too many investors have found out the hard way, investing mistakes can be quite costly! When looking at potential options on who you can trust to invest your money without making mistakes, consider each of the 3 “C”s: Cost, Conflicts, and Competence.
Cost
Awareness is on the rise for understanding the devastating impact of high fees. Investment firms, high-fee advisors and mutual fund companies have taken advantage of unsuspecting investors for decades. While there have been some regulatory improvements in recent years, historically inadequate rules for disclosure and corporate marketing tactics have enabled the successful and stealth-like transfer of wealth from investors to investment providers. According to Larry Bates, author of Beat the Bank, you can end up losing more than 50% of the investment returns that you earn over your lifetime to investment fees.
The traditional investment industry, including the various subsidiaries of banks, insurance companies, mutual fund companies or other branch-based wealth management firms, are the primary culprits for charging high fees. These companies often provide only the bare minimum when it comes to disclosure of fees, burying any relevant information in excessively long and complicated documents in the smallest font size possible. Conversations are directed towards what they provide, not what you pay for it. And rarely is it acknowledged that the representatives that you are speaking to are highly commissioned salespeople, regardless of what they claim their title is.
Add up the fees charged by your investment provider: management expenses on investment products, advisor commissions/fees, transaction fees, custody fees, account-based fees, etc. If you own mutual funds and/or use a financial advisor, you may very well be losing 2% of your assets or more per year to fees! Significantly cheaper investment options, including robo-advisors like Justwealth, exist and are very easy to switch to, but direct high costs are only one potential mistake and you still need to address the other two C’s.
Conflicts
In most commercial transactions, money is used to purchase goods or services. In the case of investing, money is used to purchase…essentially, more money. Investment product and services are marketed aggressively because it has proven to be an extremely profitable business. Investment companies will typically separate their investment business into two components: distribution and manufacturing. Distribution is the sales process – products or services are “sold” to investors by investment representatives with titles such as Financial Planner or Financial Advisor. Manufacturing is where the investments are actually made by Fund Managers or other “head office” investment professionals – investors rarely see or speak to these people.
When your investment representative recommends investing in a product managed by the same company’s manufacturer (for example an RBC financial advisor says that you should purchase an RBC Mutual Fund), that is a conflict of interest. Instead of recommending the best product available, they recommend a product with greater profitability for their company. Insurance companies, banks and the other traditional investment industry companies previously mentioned consistently commit this offence, and get away with it. Stay away from “in house” products, it is very likely not in your best interest.
Manufacturing can also be guilty of conflicts of interest, and again corporate profitability (which you are contributing to) is the root cause. Consider fund-of-fund investments. This is when you buy a single fund or portfolio, which is comprised of a number of underlying funds ranging anywhere from a couple to a couple dozen. A recent example to consider are the all-in-one Exchange Traded Funds (ETFs) which come in a variety of risk levels (for example: conservative, balanced or aggressive growth) with a relatively low cost and have been a big success for companies like Vanguard and iShares. Well, what do you think these companies choose to put in their all-in-one ETF funds? Why their own individual ETFs of course because that would be best for their overall profitability. Profitability trumps a best-for-investor approach to selecting underlying products, which coincidentally is the approach that Justwealth uses.
Now with five years of history, we can compare annualized data as at June 30, 2023 (see details in next section on how to make fair comparisons):
| After-Fee Performance as at June 30, 2023 * | |||
| Investment Provider | 3 Years (%) | 5 Years (%) | Annual Fees (%) |
| Justwealth Global Balanced Growth Portfolio | 7.82 | 5.89 | 0.68 |
| iShares Balanced Portfolio ETF | 5.09 | 5.54 | 0.20 |
| Vanguard Balanced ETF Portfolio | 4.64 | 4.77 | 0.24 |
| BMO Balanced Portfolio ETF | 4.68 | N/A | 0.20 |
| * Click on Provider name for important disclosure information | |||
Keep in mind, Justwealth provides investments and investment advice and charges a higher fee than the all-in-one ETFs which are just an investment product that comes with no advice or service (unless bundled with servces from an investment representative which will reduce the above all-in-one return exactly by their fee rate). So, conflicts of interest can be shown to be another cost that investors end up paying for in the form of lower returns.
Competence
There are companies that tell you how great they are (i.e. advertising), and then there are companies who show you how great they are. An investment provider may be well-intentioned, and have low fees, but if the provider is not competent, that may have the most harmful effect on your wealth!
Investors are often intimidated by investment providers who over-complicate the process to make investors feel like they need their help. Furthermore, the person that you are often speaking to, is not the person ultimately responsible for how your investments perform – recall that is the responsibility of manufacturing. You need to be confident that both the person that is responsible for your account, and the manufacturer are BOTH competent.
Assessing competence of an individual representative can be difficult, especially since slick salespeople are usually employed in those roles. But if you notice obvious flaws like poor listening skills, a lack of experience, lack of knowledge, limited attention to detail, etc., turn and run! Assessing skill of the manufacturer can also be very complicated, but you can certainly do some performance comparisons and draw your own conclusions. The key thing to remember when comparing performance is that it should always be “apples to apples”. Most investing aspects like asset allocation, risk level, products used, and the measurement time period should be the same between the investment providers.
As an example, let’s compare the performance of Justwealth vs. Wealthsimple – two online firms who use ETFs to invest in broadly diversified portfolios across different risk levels, and both with low fees. Could the returns possibly be that different? As at June 30, 2023, performance for an “above-average” risk level can be found publicly on both provider’s websites:
| After-Fee Performance as at June 30, 2023 * | |||
| Investment Provider | 3 Years (%) | 5 Years (%) | Annual Fees (%) |
| Justwealth Global High Growth Portfolio | 8.72 | 6.63 | 0.64 |
| Wealthsimple Growth Portfolio | 4.90 | 4.40 | 0.63 |
| * Click on Provider name for important disclosure information | |||
The similarities between the two companies are numerous, but Wealthsimple could arguably be labelled as a company that specializes in “marketing” (and not investment expertise). Justwealth on the other hand, barely engages in advertising at all, and claims to emphasize providing high quality investments and advice. What do the numbers suggest to you?
Be careful out there! Too many people in the investment business are motivated by commissions or other rewards to sell you products for their benefit, not yours. Many companies will offer short-term promotions, which may seem like a great incentive, but, it is likely very small compensation compared to the extra Costs that YOU pay for in the form of higher fees and/or lower returns due to Conflicts of interest or a lack of investment Competence.
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