The Quest to be 30% Richer

*A quick note – next week I will be discussing the recent market events, but had this written already last week and didn’t want it to go to waste. 

** Performance numbers presented here all come from Questrade’s own website. They also represent the most recent numbers available.

Money Can 

Questrade is Canada’s fastest growing online advisory service that has built its business on the back of a catchy refrain: “Retire up to 30% richer”. There ads are everywhere and the simple and straightforward message has landed with a punch. The principle behind their slogan is that, over enough time, the amount of money you can save in fees by transferring to their online platform can be worth a substantial amount when that saved money is able to compound.

Competing on the price of financial advice has become common place, especially as people have become increasingly comfortable doing more online. Online “robo-advisors” dispense with all that pesky one-on-one business through your bank and have focused on providing the essentials of financial planning with a comfortable interface. Champions of lowering the costs of investing have hailed the arrival of companies like Questrade and Wealth Simple, believing that they would unsure in an era of low-cost financial advice.

Such a time has yet to materialize. For one thing, traditional providers of investments, like mutual fund companies, have learned to compete heavily in price, while an abundance of comparable low-cost investment solutions have given financial advisors a wider range of investments to choose from while being mindful of cost. Meanwhile, because internet companies have a business model called “scaling” which encourages corporations to rapidly expand on the backs of investors before they become profitable, its not clear whether robo-advisors are actually all that successful. Wealthsimple, one of the earliest and most prominent such services has broadened their business to include actual advisors meeting actual people, a decidedly more retrograde approach in the digital age.

Nevertheless, efforts to win over Canadians to these low cost model continue apace, and the market leader today is Questrade. So, what should investors make out of Questrade’s signature line? Can they really retire 30% richer?

Probably not.

First we should understand the mechanics of the claim. Looking through Questrade’s website we can see through their disclaimers that for each of their own portfolios they have taken the average five year returns for categories that align with each portfolio, the average fees for those categories and added back the difference in the costs. So, for their Balanced Portfolio they refer to the “Global Neutral Balanced Category” and the five-year number associated with that group of funds (the numbers seem to be drawn from Morningstar, the independent research firm that tracks stocks, mutual funds and ETFs).

Questrade assumptions
Figure 1 https://www.questrade.com/disclosure/legal-notice-and-disclosures/2018/08/08/questwealth-portfolios-calculator

Thus, they arrive at an assumed ROR of 6.21% for five years, and then project that number into the future for the next 30 years. They also calculate the fee of 2.22% (the average for the category) and subtract that from the returns. And using those assumptions Questrade isn’t wrong. Assuming you received the average return and saved the difference in fees, over 30 years you’d be 30% richer.

Except you probably wouldn’t.

Questrade actually already has a five year performance history on their existing investments, and we can go and check to see how well they’ve actually done. Unfortunately for Questrade, their actual performance in practice is not considerably better than the average return against the categories they are comparing. For the last five years, Questrade’s 5 year annualized performance is 4.92%, less than 0.3% better than the category average of 4.66%.

But wait, there’s more!

Questrade Balanced Portfolio Performance
Figure 2 https://www.questrade.com/questwealth-portfolios/etf-portfolios#balanced

Keep in mind that Questrade’s secret sauce is not the intention to outperform markets, merely to get the average return and make up the difference in fees, but when put into practice it isn’t even 1%, let alone 2% ahead of their average competitors. In fact, we could go so far as to say the Questrade is a worse than average performer since if we assumed the same fees were to apply, Questrade’s performance would be significantly below the average return. In fact, for the purposes of their own history the above performance is shown GROSS of fees. Yes, if you read the fine print you discover that Questrade has not deducted its own management costs from these returns, meaning that the real rate of return would be 4.54%, officially below the average they are trying to beat!

Questrade Extra Disclaimer
Figure 3 https://www.questrade.com/questwealth-portfolios/etf-portfolios#balanced

Fidelity Global Neutral Comparison
Figure 4 This has been taken from Morningstar and compares the B Series Fidelity Global Balanced Portfolio performance against its category, Global Neutral Balanced. Performance for the individual fund is better than the 5 year average of Questrade’s comparable investment, and ahead of the five year average for the category of 4.66%. This should not be construed as an endorsement of Fidelity or any investment they have.

There is a temptation towards smugness and finger wagging, but I think its more important to ask the question “Why is this the case?” The argument for passive index ETFs has been made repeatedly, and its argument makes intuitive sense. Getting the market returns at a low price has shown to beat active management over some time periods. So why would Questrade underperform, particularly when markets have been relatively stable and trending up? I have my theories, but it should really be incumbent on Questrade to explain itself. What does stand out about this situation is that if you are unhappy with your performance THERE IS NOTHING YOU CAN DO ABOUT IT! Questrade’s portfolios represent their best mix, and do not allow you to make substitutions or even really get an explanation for the under-performance. The trade off in low cost alternatives is all the personalization, flexibility and face to face conversations that underpin the traditional advisor client relationship.

Given all the regulations that surround investing, I remain surprised that Questrade is able to advertise a hypothetical return completely detached from their actual returns, but that is yet another question that should be settled by people who are not me. Questrade has some benefits, not least is their low fees, but investors should be honest with themselves about how beneficial low fees are in a world when there are many options and the cost of navigating those options represents their best chance at retiring happy and secure.

As always, if you have questions, need some guidance or just a second opinion, please contact me directly at adrian@walkerwealthmgmt.com

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

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