I am thinking about moving my money to robo-adviser. What sort of all-in costs am I looking at?
When you’re calculating the fees charged by an automated investing service, also known as a robo-adviser, there are two layers of costs to consider: the fee charged by the robo-adviser itself, and the management expense ratio (MER) of the exchange-traded funds it buys on your behalf.
Wealthsimple, for instance, charges a fee of 0.5 per cent on deposits up to $99,999, and 0.4 per cent when total deposits across accounts reach $100,000 or more. This is on top of the MER of about 0.2 per cent, on average, charged by the ETFs it uses. So, your total annualized cost could be as high as about 0.7 per cent for a small account or as low as about 0.6 per cent for a large account.
Some robo-advisers are slightly more expensive while others are cheaper. Questwealth Portfolios, for instance, charges a management fee of 0.25 per cent on assets of $1,000 to $99,999 and 0.2 per cent for amounts above $100,000. This is in addition to an average MER of about 0.17 per cent for the ETFs in its portfolios.
Don’t base your decision solely on costs. Robo-advisers offer different levels of advice and personalized service, so be sure to read customer reviews and compare offerings carefully before taking the plunge. Also keep in mind that building a portfolio of low-cost index ETFs is relatively easy. If all you plan to do is buy and hold a handful of funds and make contributions a few times a year, you may decide that you don’t need the services of a robo-adviser. Going it alone will cut your costs to the bone and – all else being equal – generate better returns over the long run.
You have written about ETF distributions on a number of occasions but I am still confused. With a couple of ETFs I own in my registered retirement income fund, I noticed they paid a capital gains distribution and then they reinvested the same amount but I didn’t receive any additional units. My online broker claims it’s just a rebalancing and says I shouldn’t worry about it. Is that true? And is it better to not hold ETFs in a RRIF since there is no benefit from capital gains distributions?
ETFs typically declare reinvested – or “phantom” – distributions at year-end. These distributions do not consist of cash and do not affect the value of your holdings. Basically, they are just an accounting move to transfer the capital-gains tax liability, which arises from the fund’s transactions throughout the year, to the unitholder. Technically, you do receive additional units, but only briefly: Immediately after a reinvested distribution is “paid," the ETF provider consolidates the number of units outstanding. The end result is that you have the same number of units, each with the same net asset value, as before the distribution. So, yes, it is fair to think of it as a “rebalancing.” Holding the ETF in a RRIF (or other registered account) is still advantageous, however, because you’ll avoid paying capital gains tax on the reinvested distribution.
If I add the iShares Core Dividend Growth ETF (DGRO) in a registered or non-registered account, will there be any U.S. withholding tax?
If you hold DGRO in a non-registered account, a 15-per-cent U.S. withholding tax will apply to the distributions. You will also have to pay Canadian tax at your full marginal rate on the distributions, although you can usually claim the tax withheld as a foreign tax credit. If you hold DGRO in a registered retirement savings plan, RRIF or other registered retirement plan, on the other hand, there will be no U.S. withholding tax and no Canadian tax payable on the distributions. This is why I recommend that investors hold U.S.-listed dividend ETFs, and U.S.-listed dividend stocks, in a registered retirement account. But be careful: You will still face the U.S. withholding tax if you hold DGRO in a tax-free savings account or registered education savings plan. (DGRO is one of the securities in my model Yield Hog Dividend Growth Portfolio. View it online at tgam.ca/dividendportfolio.)
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