The financial system is not well set up for small investors. Financial advisors are called many different things, are either paid by flat rates (called fee-only advisors), or by commission (which is much more common)..

Often, the small investor cannot afford a fee-only financial advisor. Moreover, advisors who are paid commission (both initial and follow-up) are more likely to put their efforts towards the wealthier clients, and of course to sell products which maximize their profit (and not necessarily yours).

Because of this, small savers have very few options to start investing. Either they must save up a huge sum of money to pay for a fee-only advisor, or they must rely on an advisor who sells them apparently “free” products, but which hide huge management fees – and that’s when they don’t sell you totally useless stuff for your financial goals.


What are the hidden fees?

Hidden fees are as diverse and numerous as they are creative.

  • Acquisition costs
  • Annual management fees
  • Transaction fees
  • Service fees
  • Follow-up fees
  • Exit (or cancellation) fees
  • Inactivity fees
  • Annual fees for small portfolios (which only apply if you do not maintain a minimum balance)

All these fees aren’t charged simultaneously for each type of investment. However, some of them seem to go hand in hand at some financial institutions and mutual fund companies.

How can you cope? I discussed the benefits of Exchange Traded Funds (ETF) in a previous article. In this article, we will look at ETFs in more detail – how to build a balanced portfolio rich in ETFs at virtually no cost that anyone starting their investment can do.

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Exchange Traded Funds (ETFs)

Exchange traded funds (ETFs) are gaining popularity. They work a lot like mutual funds, the mechanics of which I explain in my previous article. But the difference between mutual funds and ETFs is that there is not, as general rule, a manager who selects the titles or stocks of an ETF.

Most ETFs simply copy stock market indexes. The titles (or stocks) of these ETFs gain and lose value on the stock market in the same way that individual stocks would. Purchasing an ETF can be done very easily through an online discount broker.

By using the services of an online (or in-person) discount broker, you pay transaction fees for each purchase and each sale of a stock. These fees generally range between $5 and $25 per transaction, as you can see from the Hardbacon discount brokers comparator. Fees in this range aren’t outlandish if you’re making $5,000 block purchases, but it would be a financial suicide to pay these prices for buying and selling stocks that are only worth, say $100.



Most recently on Canadian soil, companies that specialize in the management of ETF portfolios are handled by robots. These robots (which are really just computer programs) ask you a few questions to determine an investor’s profile that suits you. Then it selects a few differently weighted ETFs according to this profile. After this, the robots continuously monitor that this weighting is maintained among different asset classes. For example, if your U.S. equity securities rise faster than your Canadian equity securities, the robot sells some U.S. securities to buy some Canadian ones in order to keep the same overall proportion of each type of investments as decided on the outset.

While automated management is already well established in the United States, its progress in Canada is still slow. Among the first companies that offer these services are Wealthsimple and Wealthbar. If you’re curious about them specifically, the Hardbacon robo-advisor comparator allows you to see the differences between them, and various other Canadian robo-advisors.

Even though robo-advisors are not very well known in Canada yet, we expect these companies will experience an exponential growth in the coming years. Charges to hold ETFs are virtually zero, since they are managed, as we said, essentially by computers. Some ETFs have charges as low as 0.05% (50 cents per $ 1000 per year), but generally, you can expect average fees of about 0.35% (and in some cases up to 0.85% for ETFs that copy more complex indexes or have low volumes). In contrast, mutual funds that also allow small savers to invest small amounts each month have average management charges of 2.56% each year.


How much does it cost?

Since robo-advisor companies are relatively new in Canada, they are still in seduction mode trying to attract customers. Normally, to add the service to rebalance your portfolio on a daily basis and have peace of mind, you pay about 0.50% of your capital annually as service fees. On top of this, add the typical management fees for ETFs (between 0.05% and 0.82% as described in the previous paragraph). These management fees represent the cost of the initial investment strategy, or ETFs that the robo-advisor built and selected for you.

So on average, we’re talking about a total of about 0.7% annual charges to use a robo-advisor. However, the first $ 5,000 are exempt from these fees at both Wealthsimple and Wealthbar. If you’re looking to invest a little more, be aware that for each new customer reference, Wealthsimple gives both you and your reference an additional $ 5000 free of management fees for two years.

However, make sure to open your account yourself (or using a friend’s promotional link or even one of Hardbacon’s to get a bonus). In other words, don’t do it through a financial advisor. As a matter of fact, to expand their customer base and respond to the mobile industry, robo-advisors recently started offering follow-up commissions to financial product salespeople (in other words, financial advisors) that refer their clients to robo-advisors. These commissions are paid to the advisor who referred you, and the rate varies between 0.35% and 1.5% on a recurring basis each year!

If you do this, your advisor will be granted access to your ETF portfolio. This makes no sense in my opinion, since the basic principle of a robo-advisor is precisely to entrust management to algorithms rather than to humans. There are good arguments in favour of robo-advisors and traditional financial management, but doing both at once simply doesn’t make sense.

I was so excited by the arrival of robo-advisors in Canada that I opened an account with Wealthsimple in its very first days. Since then, I put $100 in my Wealthsimple account every month. Even though I consider myself a well-informed investor and I like doing research about correctly weighting my investment choices, I also wanted to test the service myself so I could give a sound recommendation to my clients.  

I was pleasantly surprised. First, the algorithms that decide on the weighting of investments essentially follow the MPF (Modern Portfolio Theory) of Nobel Prize winner Harry Markowitz who paved the way to modern portfolio management. Second of all, the number of transactions these robo-advisor performs is impressive – and they are done free of charge! In the last year, my robo-advisor carried out 108 transactions completely free, in addition to having reinvested all dividends (which are paid monthly by most ETFs).

I’ve come to the conclusion that using robo-advisors to invest in ETFs is an excellent starting point for young investors looking to participate in the stock market at the lowest cost. Besides, there is no minimum amount to open an account with several robo-advisors.

Robo-advisors generally encourage their clients to set up direct debit in order to deposit funds into their account at fixed intervals. This a practice endorsed by many financial advisors: to pay yourself first by putting aside 10% of your gross income automatically each payday. It’s understood to be a good way to achieve one’s financial objectives.

Opening an account with Wealthsimple requires less than 15 minutes of your time. All you have to do is “electronically” sign a number of documents and send a picture of your bank statement to prove your identity and ownership of the account.  You will have the choice to open a TFSA, an RRSP or a cash account (as well as various combinations of the three types of accounts).

It’s not the intent of this article, but when in doubt, if you are a young investor early in your career (with an income of less than $ 35,000), there is a good chance that the most profitable account for you is a tax free savings account (TFSA). This keeps your RRSP open for later, meanwhile you can still enjoy the tax-free capital accumulation.

There are many people who preach that active management (manual selection of titles by a financial advisor) is more effective than passive management of ETF portfolios which only copy market indexes. They argue that passive management could have a negative effect on the market as a whole in the sense that it forces robots to only buy stock in businesses that are already part of indexes. As the demand for ETFs increases, the demand for companies that are part of the underlying indexes will increase too, which would cause their prices to go up. And if ETFs are really growing as fast as they could, this could mean danger for the whole market. This effect, although theoretically valid, has not been observed neither in practice, nor in recent research.

A well-known columnist recently wrote that 12 of out 20 mutual funds under so-called “active management” are in fact passively managed mutual funds in disguise. Moreover, several studies show that active management is ineffective. The columnist sought to establish that these studies were skewed (and therefore wrong) by including these imposter funds. But if 60% of mutual funds (with an average management fees ratio of 2.56% annually) are really just passive funds, then why not buy real passive ETFs and save more than 2% of annual fees?


This article was compiled by Hardbacon, which has designed an online broker comparator listing dozens of Canadian online brokers. Hardbacon also helps you save on savings accounts, chequing accounts, credit cards, robo-advisors, life insurance, mortgages and personal loans. If you want to go one step further and take control of your finances, you should download Hardbacon’s mobile app, which links to your bank and investing accounts, helps you plan for your financial goals, create a budget and invest better.

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