I don’t know if you kids have been paying attention, but these days online portfolio managers are a bigger deal than stickers and actually meeting Batman.
And why wouldn’t they be? They offer what looks to be the best of both worlds. They offer affordable portfolios filled with ETFs coupled with a reasonable advisory fees. Costs are kept down by using fancy computer algorithms to do the work a normal financial advisor would do, which means investors aren’t stuck paying the 1% trailer fees which are built into the expense ratios of most mutual funds.
Perhaps the biggest benefit of online portfolio managers is avoiding the average investment professional. It’s nothing against these people, I’m sure they’re all trying very hard. But as many of us have experienced, going into their office often results in a not so subtle sell job, trying to sign you up for everything from expensive mutual funds to life insurance. We’re polite Canadians; we don’t like telling people to buzz off.
For the most part, the role of the online portfolio manager has been relegated to start-up companies, mostly because the banks and other wealth managers have an entire infrastructure in place to facilitate their existing system. There hasn’t really been a compelling reason for them to switch over to such a model, since the way they’ve always done things is still pretty profitable.
Some investors just won’t put their money in a financial start-up. Even though these companies are held to the same standards as any other wealth manager, some people will avoid them like my dad avoids the shower because they’ve never heard of them. Meanwhile, these same people are more than happy to get on an airplane ran by some obscure airline with four planes that they don’t even own to save $49 compared to Westjet.
Anyhoo, all this has changed. The fine folks at BMO Wealth Management have gotten into the online portfolio management game, launching easily managed investments through a product they call SmartFolio. SmartFolio offers investors the opportunity to build personalized ETF Portfolios easily from the comfort of anywhere that’s not in a bank. It doesn’t cost a whole lot, offers digital access at any point in time, and you can get started with as little as $5,000.
I went ahead and built myself a portfolio using SmartFolio. Here’s how it works.
Once you’ve created a free account, you have to fill out a questionnaire about your investing personality. Think of it like a first date but for investing.
You’re answering all of the standard questions, like how old you are, how long the money will be invested for, and so on. There are questions about risk tolerance too, including just how much volatility you’re willing to stomach. If you’re the kind of person who charges their phone once it hits 50%, you’re probably going to stick with something designed to protect capital. If you’re a certified REBEL WITHOUT A CAUSE like me, you’ll go a little more aggressive.
There aren’t many questions. In no time at all the algorithm will spit out your results.
So far so good. This is a reasonable portfolio based on my age and the amount of risk I said I’d be able to stomach. Personally I have a little higher fixed income than the 10% being recommended, but at the same time I do enjoy picking bonds that are a little more risky than usual. So it’s not really a true fixed income portfolio.
Let’s take a closer look at what was inside my SmartFolio.
It’s only natural SmartFolio would stick me in BMO exchange traded funds. Although BMO’s ETFs don’t get the attention that other names in the business have, they’re still competitive products.
The TSX Composite ETF has a management fee of 0.05%. The S&P 500 ETF charges 0.10%. These two ETFs together make up nearly half of the equity portfolio. They’re simple, cheap products.
There’s also very little overlap. Sure, you could easily make the argument that I would get largely the same result if I scrapped the Low Volatility ETF in exchange for more TSX Composite shares. It would save me a little bit in fees too, since there’s a 30 basis point difference.
But there’s very little overlap between those two ETFs. And at 0.35%, the expense ratio is still reasonable. Saying that, I’d probably take out the Global Infrastructure ETF. Its management fee is quite high at 0.55%, and it seems odd to give that much exposure to one sector.
Still, all in all, not a bad portfolio. And since SmartFolio manages it all for you, it really is the epitome of effortless investing.
There’s some other useful stuff built into SmartFolio.
There’s no need to rebalance your portfolio, the service does it for you. In fact, there’s no need to pick stocks or ETFs at all since they’re all portfolios managed by BMO experts.
You can always go back and change your investor profile if you find your portfolio is too risky or too conservative, but for the most part it’s designed to be hands-free.
There’s also online goal tracking built into the experience. You say a goal at the beginning of the process and it’ll be featured prominently whenever you log in to check your progress.
Finally, let’s tackle the elephant in the room — costs. Firstly, there’s a cost to owning the ETFs themselves. Count on that to be between 0.2% and 0.35% annually.
Then there are advisory fees on top of that. If you’re investing the minimum of $5,000, you’re looking at an additional $60 per year. Put it all together and you’re paying about 1.5% annually to manage $5,000.
As you invest more, the fees become more reasonable. At $50,000 in total assets, you’re looking at approximately 1% of assets as an advisory fee. At $250,000, you’re looking at paying about 0.9% annually. And at ONE MILLEON DOLLARS, you’d be paying about 0.8% annually. Dr. Evil approves.
So the costs are more than if you just would have bought the ETFs individually, but overall I think they’re pretty reasonable. Remember, this product isn’t so much for people who feel confident enough to buy the ETFs themselves. They can do that without help. This is for somebody who needs their hand held a little bit through the whole process.
All-in, BMO’s SmartFolio is a decent product.