young woman with question mark on a gray background

The RRSP season is upon us, and although the season is not as crazy as it once was, various product suppliers and distributors have begun running ads to solicit business. One of the more notable ones is from Questrade.

It goes like this. An eager young student in the front row asks her professor about tips for new investors. He says the great enemy of investors is cost, because of the negative impact it has on compound returns — a familiar and compelling setup. In anticipation of the question, the prof already has numbers on the blackboard, so he simply draws sloping lines from the starting point to illustrate his point.

The ad says if an investor starts with $100,000 and earns an 8% return over 30 years, they’d have over $1 million. It also says mutual funds cost about 2%, and if you subtract that 2% from the return and earn only 6%, you will earn over $400,000 less. The mathematics of the example is easily verified.

But there are two problems here. The first is that the ad assumes an 8% rate of return is reasonable, and the second is that it makes no mention of the cost associated with the alternative. In other words, although mutual funds do indeed cost about 2% (and often somewhat more), other vehicles such as the ETFs favoured by Questrade, as well as the services offered by Questrade, are not mentioned. It’s as if these products and services are free. They aren’t.

Let’s look at both assumptions in turn.

To begin, the major financial planning bodies in Canada recommend that a suitable assumed long-term rate of return for equities should be about 7%. Since the expected return for income is assumed to be around 3%, a growth-oriented balanced portfolio (75% equities, 25% income) should have an assumed rate of return of 6%. In other words, the rate of return used in the illustration is misleadingly high.

The second problem is that proper planning requires that both the cost of the product and the cost of the associated services be subtracted from the expected rate of return. A reasonable approximation of the combined cost of an online broker’s products and services is likely around 0.75%. Thus, while an online broker is indeed cheaper, it is about 1.25% cheaper and not 2% cheaper as the ad implies.

If one had an all-equity portfolio, the 7% pre-cost return would be about 6.25% for the online broker option ($580,148.57), and 5% for the mutual fund option ($411,613.56). The difference is a little less than $170,000.

If one had a 75/25 portfolio allocation, the 6% pre-cost return would be about 5.25% for the online broker option ($441,002.48), and 4% for the mutual fund option ($311,865.15). Now the difference is a little less than $130,000.

I am not suggesting that $130,000 is immaterial. Far from it. Rather, my point is that the Questrade ad overstates the difference by more than double.

If there is one thing that both the human advice industry and the robo-advice industry are prepared to engage in, it is Bullshift — a word I coined to describe the industry’s overarching predisposition to shifting attention and making people feel bullish about investing. It is also the title of my latest book. In my view, it would be better for all parties if the examples used were based on realistic assumptions that fairly depict the options available. This could easily be accomplished by including a fair depiction of the costs associated with those options, so people would be in a better position to make an informed decision.

I think DIY investing and robo-advising have a place. I just want investors to make an informed decision based on reasonable assumptions rather than on sales pitches that are misleading and maybe worse.

To sum up, the entire industry has work to do. It seems all channels are prepared to park realism at the door to pursue the corporate imperative of earning fees based on assets under administration. If we advisors are to be seen as true professionals, we need to be as reasonable and transparent as possible — for our clients’ sake.

John De Goey is a portfolio manager with Designed Securities Ltd.