Tuesday, November 8, 2011

Steadyhand vs. Indexing with ETFs

Tom Bradley at Steadyhand invited me to comment on their comparison of Steadyhand Funds versus indexing with ETFs. The piece is clear, balanced, and worth a read. (Disclaimer: I have no financial relationship with Steadyhand other than the fact that they’ve bought me lunch a couple of times. It would take a lot more than that to stop me from saying what I really think!)

The summary on fees in their example of two investors with $250,000 portfolios is that Steadyhand funds charge about 0.55% per year more than the total costs of running an ETF portfolio. The burning question is whether Steadyhand offers enough benefits to make up for this additional cost of $1375 per year.

Here are some of the ways that Steadyhand might earn their extra fees:

– ease of getting started
– investing advice on asset allocation
– calming influence when you’re about to do something foolish and expensive out of greed or fear (a steady hand)
– possible higher returns

Although I wish them well, I’ve cast my vote with my own money on the side that says nobody has the expectation to produce excess returns over the market return. So, even though beating the market is important to Steadyhand, I will ignore this as a possibility.

Making it easier to get started has some value, but not on an ongoing basis. This leaves advice on asset allocation and a calming influence when investors are inclined to make expensive mistakes. This is where I think Steadyhand likely adds value for the typical investor. The reason most investors trail market returns so badly is that they make big mistakes even though they think they’re doing smart things.

Knowledgeable investors would prefer to pocket the extra 0.55% per year, but many people who are overly influenced by media reports of financial boom and bust would likely benefit from Steadyhand’s advice by enough to justify the extra 0.55% per year. Investing with ETFs seems simple enough, but staying calm in a storm can be difficult. I still think that people should learn enough to invest on their own, but realistically only a fraction of investors will do this properly.

One concern I have about Steadyhand’s comparison is that any other mutual fund could produce a similar-looking document that paints them in a favourable light. As it turns out, Steadyhand’s comparison is very fair, but you have to be knowledgeable about investing to come to this conclusion. Uninformed investors who stumble onto Steadhand are likely to do well, but they could just as easily end up with someone else who sets them up with a portfolio full of funds with 3% MERs and 7-year DSCs.

So, even investors who intend to get financial advice should learn about investing enough to be able to tell if they’re being treated well or taken for a ride.

3 comments:

  1. I thought the report was fair as well though I would have quibbled with estimate of ETF costs. In my experience, the total costs are roughly 0.25% or half of Steadyhand estimates.

    ReplyDelete
  2. Interesting piece, interesting post. It does highlight an issue with comparing the approaches- you are comparing an objective factor (fees) vs. a subjective factor (value of advice). No one is going to admit that they wanted to do something stupid but a good advisor (as hard as they may be to come by) acted as their stupidity brake and that was worth a lot more than $1,375 (to use the example). Having sat as a professional advisor (albeit not in the financial sector) many clients remember the cost and not the benefits of the stupidity brake.

    ReplyDelete
  3. @CC: It's certainly possible to get costs with ETFs below 0.5%. Getting down to 0.25% probably requires using some U.S. ETFs, which brings in currency conversion costs. As you have shown in the past, these costs can be kept low as well, but the methods are not exactly simple. I would say that total costs (including MER, commissions, and currency costs) in the 0.3% to 0.4% range is fair. I don't think any of this changes the conclusion much, though -- as you said, this is just a quibble.

    @Thicken: The value of good advice is high. Unfortunately, the value of typical advice is low. While I think it is likely that Steadyhand offer good advice, there is no shortgage of advisors offering poor advice.

    ReplyDelete