Blessed by the Potato

Tangerine just released some new versions of its all-in-one mutual funds with lower fees. They have three flavours: 100% equities, 75-25, and 60-40. The new fees are 0.65%, which is competitive with robo-advisors (the actual MER will have to wait until a year has passed to be reported, but will likely be about 0.7%).

I’ve been waiting a long time for this news. It was over a year ago when they invited me to a survey about lower-cost versions of their funds and the future of their investment arm. I should note that it was a survey just as a regular customer — they didn’t hire me to consult. But, if you’re listening Tangerine, you could. I like consultant money. And the first thing I’d tell you is to not launch a new set of funds with a confusing “ETF” in the title, to just lower the fees on your existing funds. Yes, the funds all have names like “Equity Growth ETF Portfolio” even though they are not ETFs. (Though they are not the first bank to so confusingly name their mutual funds)

After a bit of confusion between announcing the funds in the fall and now, people with the old funds can finally move over to the new ones. And they made it super-easy to do: when you log into your investment account, there’s a great big “switch my portfolio” button. That’ll take you to a risk tolerance questionnaire, after which you can choose your new, lower-fee fund (or one of the old ones if you really want), and your funds will be moved over.

I’m glad it’s finally here, and gives people who have long been wringing their hands about sticking with Tangerine’s super-easy funds or switching to a robo-advisor a reason to stay. It may make Tangerine the killer choice for ease-of-use, especially in non-registered accounts. (Though if they could have shaved another 10 bp off the cost then they could have blown the robos out of the water)

However, I think I’ve read through all the documents on their site, and I can’t for the life of me find what they’re going to actually invest in. They mention an equity and fixed income split, and then a global equity index as the benchmark for the equity part. Does that mean there won’t be any home country bias in the new funds? They’re going to hold ETFs (possibly related party ones, which would likely mean the Scotia ones), but don’t spell out specifically which ones. I think Tangerine’s earned a fair bit of goodwill over the years, so for the moment I’m switching my portfolio there over to the new lower-cost funds to see how it goes, and trusting that whatever the specifics are that they’ll be fine, but some more easy to find details would have been nice (also, consulting money please).

For a long time I was the only game in town when it came to a CPP calculator that included the CPP enhancements — important for planning purposes! [Note: I’ll point back to the article on the calculator and you can download it from there — if I provide a direct download link here I’ll forget to update it next year and I’ll get hatemail in the future]

Now there’s some alternatives. Doug Runchey (yes, the Doug Runchey who writes all the CPP calculation articles) has teamed up with David Field of Papyrus Planning to create a web-based CPP calculator. It can import data from your statement of contributions if you have that, or you can go ahead and enter data manually. We here at Blessed by the Potato Publishing know that as savvy consumers you have your choice of free-to-use calculators, and there are advantages to choosing Excel: the web-based one will throw an error if you enter earnings that are above the YMPE for each year, forcing you to go back and change. every. line. manually. And fill-down is handy when playing what-if scenarios e.g, for retiring early or re-training. However, some people don’t like spreadsheets (heathens, surely, who wouldn’t read this blog anyway), so it’s handy to have a web-based alternative.

Mine is based on years, while the underlying CPP calculation (and drop-outs) uses months, so I have some approximations there. I also approximate the weird way CPP calculates the maximum pension (based on the average of the last 5 years’ YMPE) to make it easier to use real dollars into the future. That sometimes gives me a few percentage points of difference with other calculators and the ground truth — I tried to future-proof it for estimating far into the future rather than making it more accurate for pensions available today. But there will be some difference — on the main page I put a caveat that it’s only accurate to about 5% (which should be good enough for planning purposes).

So let’s see how the two calculators stack up. I compared 3 scenarios: (all amounts are per year in today’s dollars)

Honestly, I thought the only differences would come from rounding drop-outs to full years and how I estimated inflation for the 5-year average pensionable earnings, and that the differences would likely have come to ~2%, so I was a touch surprised to see a few scenarios with greater differences. Still, all scenarios are within my 5% “good enough for planning purposes” margin of error (assuming that the real value would either be between our two estimates or that DRDF’s version is precise to the dollar). For long-term planning/what-if scenarios you probably have more uncertainty than that about time off work (like in say a pandemic), and if you’re close enough to need precision to the last dollar, then you may want to hire Doug to run a personalized calculation.

It’s also informative to compare the scenarios: the first two are the same set of earnings, just for different starting points. The difference in the amount of CPP the hypothetical people get is due to the CPP enhancements. The 35-year-old has almost their entire working career (since we don’t start them until 30 – 2016) in the enhanced CPP regime, while the 65-year-old finished just as the announcement was being made.

They also include a break-even graph, which is something I’m on the fence about.

I had the idea to add one in to my calculator a few versions ago, but there were two main problems with that: 1) it’s work and I’m short of time and kind of never want to have to dive into CPP calculations again, and 2) I’m afraid it’s terribly misleading. This deserves its own post (which has been in the works for years now and has been scooped (and done better) by MJoM and a recent paper by Bonnie-Jeanne MacDonald) but briefly, it’s a mistake to try to frame it as a decision where you want to get the most out of CPP in an expected value calculation. The point is not to be playing a game of you versus the government* where you die at 75 and go “ha! I took CPP early and WON! Screw you, government!” These break-even analyses frame it wrong and get you thinking about how long you’ll live (which we are really bad at estimating) and make a decision based on that.

CPP has enormous, unmatchable longevity insurance benefits. There, that’s the main point and why you shouldn’t get too hooked into these break-even calculations. Basically, you should always defer it to 70 unless you can’t because you need the money now (i.e., you don’t have the savings to live off of in the first place — which should cover those who would get GIS), or you have a specific diagnosis/severe risk factor that limits your life expectancy (not that your parents died young of something with weak inheritance [like getting hit by a car or having a heart attack] or that you can’t possibly imagine growing that old). Just saved myself another 3,000 word post.

Some people also frame it as spending more early vs later, which is wrong too. As Michael James puts it (though I can’t find the specific post to point to), delaying CPP to 70 lets him safely spend more of his savings now, knowing that the long term is taken care of by CPP — he gets to safely spend more throughout his retirement, including the early years by deferring CPP.

PS: Doug & David say when you sign up that they won’t spam you, and that’s mostly true. They look to have a script set up to send you messages for the 3 days after you sign up, but they’re not solicitations.

* – I have to credit Sandi Martin with coming up with this analogy.

As the title states, this is a question to all the smart BbtP readers out there — does anyone know much about captive insurance companies?

I came across the concept when looking into how a certain popular be-all robo-advisor was offering people a way to buy bitcoin. Now, without going on too much of a rant, bitcoin is stupid in large part because it’s stupidly hard to get and keep. There are huge barriers to entry to regular people, but it’s going up and people want to buy, so there are a whole host of businesses springing up to serve that market. There are companies that are buying bitcoin on their balance sheet¹, trusts that simply serve as publicly-traded securities that hold bitcoin, as well as a bunch of brokerage/exchange type services that range in professionalism from a group of basement-dwelling hackers cosplaying as investment bankers to groups with actual infrastructure and legal agreements.

There’s a huge trust problem with bitcoin (or crypto in general) — if you lose your keys, or get hacked, your coins are gone. If you die and forget to give your heirs the key (or let them know the coins exist in the first place), they’re lost forever. If you let someone else hold your coins and they get hacked (or fake their death and abscond with the money or whatever else might happen), then they’re gone, with no regulator to cry to reverse the transaction. For the most part, people don’t seem too worried about this — it’s a mania after all, you can’t sit around when there’s buying to do! As far as I’m aware, all of the more-convenient ways to access bitcoin trade at a premium, indicating that people want the convenience and are willing to pay for it (or can’t arbitrage it away).

So I checked out that be-all robo to see what all the fuss was about. And while bitcoin isn’t covered by CIPF, they say they’re insured. So if you click through the fine print, they’re using the services of an American company specializing in being a custodian and exchange for crypto. And they have a Bermuda-based captive insurer providing $200M of coverage, and that sounded weird to me. I don’t really know how captive insurers work — I could do a search and see that it’s when the insurer is wholly owned by the company taking out the insurance, which explains the name. But I don’t know how to answer the main question: do they actually have $200M in assets to backstop that insurance policy (or sufficient re-insurance)? Is there a Bermuda-based regulatory filing database like SEDAR?

Hopefully one of you knows.

1. I fully expect Tesla to announce they’re doing that or have been doing it all along and that’s the explanation for the interest income anomaly.

Passiv is a neat tool that helps you manage your portfolio. It plugs into your Questrade account, and can send you email notifications when new money arrives in your account, and can even do one-click rebalancing of your portfolio, either by just distributing un-invested cash to the parts of your portfolio that are under-weight, or by also selling parts that are over-weight.

I should mention that they now have a referral program and I’m part of that — you can find a link over in the sidebar where the advertisey stuff goes.

So they recently put up a blog post comparing the costs of all-in-one ETFs to unbundling them and investing in the handful of underlying funds. Usually you’d also have to consider and weight the extra work and complexity that goes along with the savings of unbundling, but the pitch is that Passiv can manage the rebalancing and multiple purchases for you, so it should just come down to cost.

I’m a big fan of the all-in-one ETFs, in part because they force you to look at your portfolio as a whole, on top of the convenience factor. Even with no rebalancing to do, you can still make use of Passiv to do the purchases for you with one click, and send those emails when new money arrives in your account. And for the moment those services are free to the user.

But if you want to get the lowest possible costs, then sure, you can save a bit by investing in a set of individual ETFs. However, the comparison in the post is missing a few important factors. Yes, you will pay a slight MER premium for the convenience of an all-in-one fund. But that doesn’t mean you should automatically break them apart to seize those savings, even with Passiv to help. Also, the MER premium is a bit smaller than their post makes out — only about 8 bp.

Commission Costs

First off, the article completely ignores transaction costs. While ETFs are nearly free to buy at Questrade, you do have to pay to sell an ETF. And if you’re manually rebalancing, you may sometimes have to do that, especially once your portfolio gets large enough to be hard to rebalance from regular contributions making purchases only.

If you have 3 holdings to sell every 6 months, that’s just $30/yr in commissions, which doesn’t sound like much. But with just 8 bps of savings on the table, you’d need at least $37k invested to break-even. That same comparison also shows how little the convenience of the all-in-one funds costs for smaller portfolios — $30/yr for the convenience on a 5-figure portfolio.

Ok, that’s not a high bar, and below that point you’re almost certainly going to be able to rebalance with new cash rather than having to sell something first anyway. But still, it’s worth pointing out if you are considering using multiple ETFs.

US Funds Complication

A mistake in Passiv’s blog post is comparing a Canadian product to a mix of Canadian and American funds. For example, in saying that you can save 13 bp by breaking apart VGRO, the blog post is putting an allocation toward VTI, the American-listed ETF; similarly for breaking apart the iShares funds, the author is looking at several US-listed funds, which would be more expensive on the Canadian side (ITOT, IMEG) or have no exact analog (USIG, GOVT). But those currency exchanges are going to be tricky (and potentially costly) to handle, and those costs aren’t included in the comparison. Using a Canadian-listed fund would make for a fairer comparison. VUN, for example, rather than VTI. The Canadian versions carry MERs that are a bit higher, reducing the benefit for breaking up VGRO to just 8 bp.

What About Quantization?

Take a look at XGRO’s allocation (which I’m pulling from their post rather than double-checking with iShares myself). It has two components with just a 2% weighting, and then a 3% and 3.9% allocation. Will there be an issue trying to actually hit those small targets, especially if the underlying ETFs can only be purchased in whole units costing say $80 each when trying to invest on your own?

I thought this quantization issue might also be a factor in the decision of whether to break up all-in-one funds, particularly for smaller accounts. While I can really cherry pick and say that if you have $18k, you can’t get within 10% of a 2% weighting with a fund that costs $80 CAD (USIG for example) — 5 shares would be 2.22%, while 4 shares would be 1.78%. I don’t know how Passiv would handle that if you had your rebalancing threshold set at 10% or tighter, would it keep flipping back and forth, buying and selling a share to try to hit an unachievable target allocation? But for the most part, quantization isn’t really a real-world argument for sticking with all-in-one funds. You’re unlikely to run into any issues with it, especially if you’re willing to increase your rebalancing threshold until your portfolio grows larger.

But concerns about buying very small amounts of these funds that the all-in-one ETFs happen to use could lead to a bit of analysis paralysis: should you blindly follow what they have done, or use a 3- or 4-fund canonical portfolio instead?

Summary

I’ve been telling people how to invest in a canonical portfolio for years, and I’m a big fan of the all-in-one ETFs. If you want to save a bit of money and use separate ETFs, be my guest, especially if you have a 6-figure portfolio where the minor cost savings may be worth the extra bit of effort. If you want to use Passiv to help you do that, that’s great. But I don’t like the post’s insinuation that all-in-one funds are costing that much (by framing the extra costs as a percentage difference off a very low base cost) or are “less than ideal”. It ignores the other benefits of simplification (such as better behaviour), and it over-states the benefit by ignoring commissions and currency conversion costs.

Back when robo-advisors were new — who are we kidding, for financial services they’re still new — people had lots of concerns about the new services. Chief amongst those concerns were whether investors’ money would be safe if/when one of the firms went under. We predicted that this would be a risk of inconvenience rather than a risk of losing real money: because of the custodian broker relationship, you would still have your assets somewhere (though those have their own risks), but the firm would no longer manage them. But if a firm went under, you wouldn’t lose your assets with them.

What happens if a firm goes out of business? Then the underlying investments — which are held at a “custodian” — can be transferred to another broker on your behalf. You can ask each firm about the details of their custodian arrangement, but as far as we were able to determine, every firm listed holds your investments at a custodian that is a member of IIROC.

So, aside from the usual risk of the investments themselves and completely unforseen events, investing with the relatively new robo-advisors should be no more risky than traditional means.

Well, we have our first robo-advisor failure! Planswell suddenly shut down operations this month, and we’re seeing those predictions play out in practice. Investors’ assets are still held at the custodian, and other than the inconvenience of having to move them and pay a transfer fee, nobody’s assets went up with the firm — the custodian brokerage relationship is working as predicted.

Planswell customers now have to figure out what to do with their assets. One choice is of course to learn to DIY and move to Questrade for ETFs or TD for TD e-series. Otherwise they can move to another robo-advisor if that’s what worked for them and still the right choice. Planswell is suggesting a few that use the same custodian (e.g. Justwealth and Wealthbar), which saves on transfer fees. Note though that if you ask and have enough assets to move, many firms will cover your transfer-out fees.

As for prognosticating, I’ve been surprised so firms have lasted as long as they have. I keep expecting a wave of consolidation — not necessarily abrupt closures like Planswell, but I’m surprised someone (the big banks and Wealthsimple are obvious acquirers) hasn’t been buying up the other firms. Dale has a post up on the slow growth of the robos which may add to the issues and stress in the future.