Flat-Fee Robo-advisor Model

February 22nd, 2016 by Potato

For a little while now I’ve been thinking of doing a little comparison between robo-advisor models that spans a few years. The flat-fee model (exemplified by NestWealth) tends to work out better for people with more funds to invest, while the percentage model (e.g. WealthSimple) has the edge for investors starting out with smaller portfolios. However, small investors don’t stay small forever, and there’s a lot of inertia involved in investing: once you pick a service you’re likely going to stick with it for a few years or even decades, rather than starting with one model and switching to another once your portfolio gets big enough for it to become the winner. So there may be cases where it makes sense to go with a slightly more expensive option up front that will end up relieving you of the need to switch later, providing you with a better longer-term outcome.

Well, before I even had a chance to start a spreadsheet to examine it, Sandi Martin rings me up to say that she’s just implemented exactly that kind of feature in the latest version of the Canadian Online Investment Fee Calculator. Synchronicity.

So for example, if you have $50,000 to invest today (and no interest in DIY-ing with e-series or ETFs), you might go to the calculator and see that WealthSimple is the cheapest option for you right now. But if you’re diligently saving $15,000/yr, you’ll quickly get up to the point where a flat-fee model like NestWealth or ShareOwner (now owned by WealthSimple) will work better for you. According to the calculator that point will be hit around year four or five for this example, with the ten-year overall fees being a pretty tight race (though the flat-fee model will continue to be better into the future from that point). So maybe you’ll decide to go with one of those options over a percentage-based model even if it costs a bit more now because it’ll work out in the long term and you won’t have to move your investments in a decade to save a little bit of money then.

Now of course I have to end by reminding everyone that cost isn’t everything, and that the advice or other convenience factors can create value for money (e.g. if one best lets you stick to your plan and avoid behavioural pitfalls, that will be worth more than the pretty thin difference in costs with these providers) — and if a robo-advisor will help you stay on track better than going it alone, then that may be worth the increased costs over the DIY route.

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