Blessed by the Potato

I haven’t talked about the new wave of robo-advisors in large part because I’ve been neck-deep in book stuff, but now that Sandi has her excellent post up, let’s get into it.

Important book notice: there’s less than a week* left to go to pre-order and get free shipping or a special price on the ebook! Read more about the book here.

Not so long ago an article came out by Dan B/CCP concluding that robo-advisors were impossible in Canada. I took it as a challenge and started sketching out the plans for one and lining up programmers to make it happen — but then almost immediately sat back down to focus on the book first (which I was hoping would be successful enough to provide the risk capital to build the Canadian robo-advisor**).

It appears as though I’m not the only one who took the article as a call to arms, as less than 6 months later the robo-advisor invasion began.

It is a very cool concept: for less than the cost of a full advisor you can get access to a passive portfolio that will be automatically rebalanced: low-cost passive investing with the convenience of throwing cheques at your mutual fund salesman. As Sandi points out, not everyone is prepared or cut out to be a DIY investor, so some intermediate-fee, intermediate-service options are very welcome.

I do have a few concerns, however:

• These are almost all new companies.
• They launched within weeks of each other (or, inconveniently, within days of building the comparison spreadsheet).

Combine those two and I have some doubts that they will all still be here 5 years from now***. There are only a few discount brokerages in Canada: those with the big 6 banks, Questrade, Qtrade, and Canadian versions of multinationals (HSBC, VB, IB). That could be because of oligolopistic collusion, or because it takes some scale to survive. I’m not sure ~4 new players will survive — though if they do it will likely be because of a large shift away from high-cost funds, which will be welcome. And given how closely they launched, I have fears that at least a few of the offerings rushed to market not fully formed (though no reports yet of any problems so maybe all is copacetic).

On top of that is the challenge of deciding which one to go with: the fee schedules are like a tax return, with marginal rates and a dependence on which province you live in. Oh, and what exactly you invest in as the fees for the underlying funds are often on top of the headline price, and those vary with your risk tolerance choices. Yes, that helps them keep costs as low as possible, but means Sandi had to make a complicated spreadsheet just to compare the offerings. I have concerns that the complication and multiple layers of fees could turn people off.

Finally, they just aren’t that cheap. Yes, they’re head-and-shoulders better than a high-cost actively managed bank fund, but they can’t even match TD e-series on fees. If TD ever decides to open e-series to their salesforce then these guys could be in trouble. For some people, these offerings will be well worth it (and again, Sandi makes that point much better), with costs well below that of a high-fee mutual fund salescritter and possibly equivalent service. For others, saving a few hundred or even thousands of bucks a year will be worth going the DIY route and investing directly in the same ETFs these services use****.

Which of course brings me back around to The Value of Simple — the how-to guide to for all this ETF and investing stuff. You should at least read it so you know what you’re paying your robo-advisor (or human advisor) to do for you.

* – Why less than a week when the book doesn’t come out for almost two? Because it normally takes a few business days to ship, so if you order after ~Nov 26 it wouldn’t arrive until after Dec 1st anyway.
** – Also, all of the programmers/developers I knew were too busy doing something to try to improve cancer care and research. Priorities, I tell ya.
*** – Not to engage in fear-mongering. There’s no reason to suspect that any of them are on shaky footing, just talking about general competitive pressures. Also, your underlying holdings will be fine even if one does go under or get absorbed — the worst-case is more likely inconvenience and a triggering of capital gains in a non-registered account if funds have to be liquidated and converted to the new custodian’s nearly equivalent offerings.
**** – Of course, I come from the bias that DIY is not so hard and not so scary and lots of people could be doing it. If you’re stuck on the other side of the fence, then a robo-advisor is a much smaller hop from a “full”-service advisor.

I have a few posts on the publishing process in the drafts folder, but I don’t plan on getting into that until a month or two after the book is released. However, I did want to talk briefly about pricing because I’m worried about a potential scam and other issues with the retailer listings of The Value of Simple.

The potential scam is that Indigo has a “used and rare” edition of the Value of Simple for sale. Rare is right — there are precisely 8 copies in existence* that are not currently in front of me. However, unless one of three reviewers has decided to flip their copy, the others are either accounted for or are still in the mail. The odds that someone actually has a copy at this point to be selling used is virtually zero — and they’re charging more for the used one than a new one, which also suggests a scam attempt.

The other pricing issue is that I set up the book’s barcode to encode a Canadian price of $16.95. It says in plain text “Canada $16.95” on the back (which you can clearly see in the back cover image on Amazon). It is listed (from what I can see) in Ingram’s distribution catalog as having a Canadian price of $16.95, and the Library and Archives Canada ISBN service has it at $16.95. The price, in other words, is clearly intended to be $16.95 in Canada. Yet Indigo has it at an “online price” of $17.05 (“regular $17.95”) and Amazon.ca at a whopping $19.xx! I’m not too concerned about ten cents at Indigo, so I haven’t been bugging them, but Amazon could make people angry by charging so much more than the clearly labelled price (and I don’t want them angry with me!)

It seems that there’s a behind-the-scenes aspect to Canadian pricing that I wasn’t told and didn’t consider: Amazon, and maybe even Chapters, may not pay the Canadian price when they buy the book wholesale from the distributor. Often, books have what I sometimes call “FU Canada” pricing, where the price is higher in Canada, and by a fair bit more than the fair exchange rate would suggest. I figured this is my book and it’s not for Americans so I wouldn’t set a USD price at all. At the last stage in listing it with Ingram for distribution I found I had to include a US price (their “choose only those markets you wish to distribute to” turned out to mean “choose only those markets in addition to the US that you wish to distribute to”). So, on the fly, I set a price a bit higher than simply the fair exchange rate (also to try to discourage an unwary US bookstore owner who didn’t read the description closely enough from ordering it and disappointing an American buyer). This seems to have backfired as now the Canadian stores (and Amazon.ca) are using prices higher than what’s listed. I’ve tried contacting Amazon. I had a friend try contacting Amazon as a concerned customer, and they told him the “manufacturer” (I thought for books the term was printer or publisher?) set $19.xx as the MSRP and they do not “fix the price.” Retailers are of course free to set their own prices above MSRP if they so choose and can make money doing it, but I don’t like the fact that Amazon seem to be saying that $19.xx** is the MSRP when clearly — clearly — it is not. Update: Amazon has lowered the price to $17.05. Close enough.

Hopefully that will get sorted out after release. And while I will welcome any sale through Amazon, so far I’m only linking to the (correct!) [the Kindle listing was correct out of the box:] Kindle listing because I don’t feel right pointing people to a price that’s incorrect by such a margin.

In the meantime, if you’d like to order a copy at the “proper” price of $16.95 (plus a nickle in rounding fees) there’s always my own store — and pre-orders will get free shipping and no tax. After the pre-order period though, if you have a lot of things on your shopping list (or even just multiple copies of the Value of Simple) it may be better to pay slightly more at the retailers because they’ll give you free shipping if your order is large enough (and through dark magicks and unholy pacts they can make a parcel arrive in a day whereas Canada Post will take at least four to deliver the ones I send).

Finally, a while ago (when I was still pushing Potato’s Short Guide to DIY Investing) I set up an author account at Goodreads. The way they handle common names (like mine) is quite frustrating: neither of my books is actually linked to my profile, and despite submitting two trouble tickets with their “librarians”, I’m still listed as authoring just one work: Is That Cat Dead?: And Other Questions about Poison Plants, which I didn’t actually write. I know what you’re thinking: “but Potato, are you sure you didn’t write that? It does sound exactly like the kind of book you would have written in March 2010 when you were procrastinating on submitting your doctoral thesis and were seriously sleep-deprived. You might just not remember.” And ok, there are blocks of time that I can’t really account for during that period, but I’m pretty sure I lost them to StarCraft 2 and Facebook, not writing a book about cats and poison plants.

* Outside of the Ingram printing facility, as I just got the email that the first print run is done.
** The $*.xx here is because the price is fluctuating ($19.34 one day, $19.29 the next), which also suggests that they are doing some funny conversion and mark-up math on the USD price rather than using the CAD price.

I provided a table of three great options for index investing in The Value of Simple (excerpt in the last blog post). Why those three? Quite simply because they represent the best options available in the market, at various points of trading off cost and simplicity. Aside from paying an advisor to do it for you, nothing gets simpler than Tangerine’s single fund and super-simple website and tablet app. You don’t even have to call someone to set up a preauthorized purchase plan. Many fund companies have regular (no-load) mutual funds that track the main indexes, which will let you set up a good index portfolio with ~4 funds. However, rebalancing 4 funds is the level of difficultly that TD e-series sits at, and nothing is as cheap as that in the mutual fund game. Beyond mutual funds there are ETFs, which is where it gets as cheap as it possibly can, but at a significant step up in terms of difficultly. Questrade offers no-commission purchases, low commissions for sales, and accounts only have to have $5000 to avoid maintenance/inactivity fees.

Here’s a list of the other options, and why they didn’t make the book:

• BMO: Though BMO offers low-cost index funds traded on the stock exchange (ETFs), and in a quasi-Vanguard manner allows its mutual fund investors to invest in the same indexes, it does not manage to make the offering very attractive. Though you can buy in with as little as $50, the MER on their Canadian equity fund is 1.05% — barely a hair below Tangerine.
• CIBC: Index funds have high minimum purchase ($500) and high MERs — at 1.14% it’s higher than Tangerine’s.
• National Bank: Their index funds are moderately competitive, with MERs of just 0.66%. The funds are a little less diverse than I would like — the Canadian index tracks the TSX 60 rather than the full composite, and the US index tracks the Dow (30) rather than one of the larger indexes like the S&P500. The minimum initial investment is $500.
• PC Financial: It looks like PCF has recently updated their offerings to get closer to Tangerine. Their portfolios are marginally more expensive, and include more asset classes. Their “Balanced” fund, for example, has 50% fixed income, of which 5% (of the total fund) is in international bonds. The international equity component is split with separate European and Asia-Pacific indexes. Each fund “portfolio” has a slightly different MER; the balanced fund is 1.09%. Like their CIBC parent, they require $500 to invest at a time. PCF offers a 0.1% discount to the CIBC MER (it’s not clear from their website whether this is included in the MER listed), but this discount is distributed quarterly as extra units and counts as taxable income in non-registered accounts — a nightmare for bookkeeping in a non-registered account.
• RBC: Their index funds are not outrageous with MERs between TD’s e-series and Tangerine — but at 0.72% it’s still beaten by TD’s e-series.
• Scotiabank: The mutual funds arm of Scotia has high initial investment requirements ($1000) and with an MER of 1.00% on their Canadian Index fund they are not competitive with TD — it’s barely better than the simpler Tangerine.
• Scotia iTrade: Scotia’s discount brokerage arm was one of the first to come out with commission-free ETFs (mere weeks after the release of the first book, I might add). However, only a select list of ETFs are available, and none of them are the mainline ultra-low-cost broad indexes. You can build a decent portfolio from their offerings (e.g. to follow the broad TSX composite you would buy both HTX for the TSX 60, and XMD to cover the rest), but the average MER will be closer to ~0.3%, at which point TD’s e-series don’t look so bad, or for large accounts even paying the commission for XIC will put you ahead of using the list of free-to-purchase ETFs.
• QTrade: (Different from Questrade) has some commission-free ETFs; basically the same list as Scotia iTrade.
• Virtual Brokers: Very competitive with no-commission ETF purchases, but require $15,000 minimum account to avoid fees. This was basically a coin-flip as to whether I wanted to include it or not, and in the end I didn’t see anything from VB that Questrade wasn’t already offering, so I kept the line-up as simple as I could.

I was a little hesitant at first to recommend specific companies, but the fact is that they offer indisputable advantages for the reader, and giving detailed step-by-step instructions is only feasible with a few definite options.

For the average investor, a low-cost index investing approach is the easiest and simplest method available, and also provides the highest chances of long-term success. While there is a lot of material available on why investors should choose passive approaches over high-fee active mutual funds and what passive investing products exist, the average investor is at a loss on how to implement a passive index investing plan. The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing provides a plain-language explanation of how Canadians can implement a low-cost index investing strategy, with step-by-step instructions and a focus on developing good investing processes. Coming December 1st.

This is a brief excerpt from my upcoming book The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing. It has been edited to stand alone.

After you’ve done your planning and are ready to invest you have to set up an account somewhere and implement your plan. For most people passive investing through index funds is the best way to go, but even within that strategy there are many options out there. Two key considerations are the cost of investing and the complexity of the system, which may become a balancing act between the two. Don’t underestimate the value of simple — an easy-to-follow investment plan will pay in the long-term if you’re more likely to stick to it. Though nearly every bank and brokerage provider will have some form of account and fund for you to invest in, three excellent options using low-cost index mutual funds or exchange-traded funds (ETFs) are at Tangerine, TD Direct Investing, and Questrade. Each one provides greater cost savings at the trade-off of increased complexity.

In my opinion, TD Direct Investing and their e-series index mutual funds represents the best balance between cost savings and effort required. This is not because I receive any kind of compensation from TD, but rather because I truly believe that the e-series index funds are the hands-down winner for investors starting out. They offer the ability to invest in passive stock and bond indexes, in non-registered, TFSA, RESP, and RRSP accounts, with low MERs on the funds and (if you satisfy certain conditions) no other annual fees. Then they are not much more expensive for ETFs when your account grows larger and you’ll already be familiar with the platform.

Tangerine (formerly ING Direct) is a good option for people with smaller accounts. Things are even easier than TD with their investment funds: all you have to do is pick from one of four basic asset allocations, and they will take care of the rebalancing — and they will even help you decide on your asset allocation through a questionnaire. Just make your regular contributions to the fund you’ve chosen, which you can easily automate with a pre-authorized payment plan. There are no extraneous fees beyond the MER. Tangerine is, simply put, as easy as investing gets without paying a commission to have a salesperson do it for you. The simplicity is great, but the MER of the Tangerine funds is more than double that of the TD e-series funds (yet still half that of typical funds). As your assets grow, this cost difference will become more noticeable. At the hundreds-of-thousands level, you’d be able to go with a fee-based advisor who would use index products for you for a similar fee.

For the absolute cheapest option, commission-free ETFs at Questrade can’t be beat. You pay nearly nothing to buy, and a small commission to sell (about $5-10 per trade, depending on how much you’re selling). And the on-going MER of the ETFs is as low as you can possibly get for investments. However, the order-entry process is a fair bit more complex than with the mutual funds for Tangerine and TD, and you have to deal with rounding off to whole units rather than just investing a given dollar amount.

Three Investing Options — Effort vs. Cost

There are many other options available: every major bank has an associated discount brokerage arm where you can buy the same ETFs available at Questrade or TD Direct Investing; some banks and mutual fund companies offer relatively low-cost funds that are competitive with Tangerine’s. These three options, however, are the archetypical combinations of low fees and convenience at various points along the trade-off. I will provide step-by-steps for using each, along with general information for buying ETFs at brokerages other than Questrade.

Footnote from the table: 40. Assuming 25% in each of a bond fund, Canadian, US, and International equities. For dollar comparisons, assumes $10 in commissions per year. If you decide to shift to ETFs and want to stay with TD Direct Investing, assume that you will have about $40/yr in additional commissions over Questrade. Rounded to 3 significant figures.

This has been an excerpt from The Value of Simple, a how-to guide to index investing for Canadians coming out December 1, 2014.

If you’re interested in opening a Tangerine or Questrade account, I have referral codes in the sidebar which will provide both of us with a bonus.

A little while ago I discussed pricing for the book. I wanted to grow up and move away from the *.99 type pricing to a scheme that would give an even amount after tax, for the few people that might be paying in cash.

Since then I’ve had a little bit of time to very superficially skim the literature on pricing and it looks like yes, people are used to prices set just below a dollar break point, and if you ask them they will rationally round up: show them a book at $16.95 and they’ll say “yes, that’s a $17 book.” No one is fooled by this pricing. But studies also show that despite knowing that, people will still be more likely to buy an item at $16.99 than at $17.00.

On top of that, even if it doesn’t work, that’s the way everyone else does it. So sure, I’d like to move to more rational pre-tax (and thus after-tax) pricing, but Wayfare had a good point: for a book that isn’t going to fly off the shelves no matter the price, why take the risk of setting a price that looks weird? Even though I have full control over my pricing and could set it up to fit my idea of how things should be, it doesn’t make sense for me to try to tilt at that windmill now. The risk of someone going “What’s with that price? This guy must be some crazy self-publisher, I’m out.” are far greater than the chances of someone going “What a novel idea! This book must be even more fantastic!” So when the book comes out, you’ll see the price ends in .95.

Similarly, all-in pricing would make sense. Right now if you pre-order the book from my e-store the special pre-order price is all-inclusive: when you get to PayPal for the final checkout step the price you saw on the front page is the price you’ll pay, no extra taxes or shipping. But again, as Wayfare says, no other store works this way. Sure, Amazon and Chapters will offer free shipping, but only if you order multiple books. Yes, I hate added fees and taxes calculated later — and it makes setting up the e-commerce software much simpler on the back-end — but everyone is just used to those things, and seeing a higher up-front headline price may scare people away. So when the special pre-order discounts go away you may actually see the headline price on my storefront decrease while the all-in price increases as I add a shipping & handling fee on the back-end.

Of course on the flip side, extra shipping costs are the main reason people abandon their shopping carts, so I’ll try to head that off by noting the flat-rate Canada Post shipping in the product description on my page. And all this hand-wringing may not matter past the pre-order period as once the book is listed in Amazon most people will likely follow that link rather than the one to my own store.