Investor profile

  • Portfolio size: $150,000 and below
  • Tax status: taxable
  • Time horizon: over 15 years
  • Risk: moderate
  • Objective: growth


  • 20% Canadian equities (S&P/TSX Composite)
  • 20% U.S. equities (S&P 500)
  • 20% International equities (MSCI EAFE)
  • 40% Canadian bonds (DEX Universe)

In the explosive growth of exchange traded funds over the past decade (from 3 to over 300 in Canada, from 100 to over 1,300 in the U.S.), the industry may have underserved the key potential beneficiary of the products’ myriad benefits; the retail investor with a modest portfolio (under $150,000).

Developing a high net worth practice

In developing a high net worth division for a successful institutional investment management firm, my colleagues and I devised a rudimentary online program that would provide diversified-managed portfolios of ETFs for those with as little as $50,000 to invest. Investment advisors know that investing, like many other endeavors, is a statistical undertaking. A certain percentage of $50,000 clients will become $250,000 clients and, over time, some will have $1 million and more. We felt this would be a perfect “feeder” system for our high net worth business because we lacked a branch network like the bank-owned firms. But even we were focusing on the statistical anomalies, the 15% that would graduate to the higher revenue target business.

Today, investors with less than $150,000 in investable assets are marginalized by the system. Some investment dealers actively discourage their advisors from soliciting these investors by levying surcharges, shunting them to salaried staff or encouraging them to consider online brokerage accounts. Branch employees promote expensive mutual fund choices. Whether escalating compliance costs or simply focusing advisors’ finite time on higher revenue opportunities are the cause, fewer firms want these investors.

The reality is that over the next five years, according to a McKinsey & Company report, 70% of all investable assets will be in the hands of people who have retired or are about to retire. These accounts won’t be growing via positive cash flows. Addressing the needs of investors with modest portfolios will become a necessity for the industry. Many investors will pursue the do-it-yourself route, but some will remain with investment advisors who must find a more systematic way to manage their portfolios, their requests and their needs.

Low-cost diversification

Emerging Gen X and Gen Y investors look online for information before investing. The message online is clear: control costs and diversify.

Why low cost?

One of the few things investors control with any certainty is cost. Most long-term investments, such as stock and long-term bond funds, can’t tell in advance what their returns will be, but you know how much they will cost with some confidence.

With current interest rates and global growth struggling, a 7% per annum expected return may seem aggressive but is not unreasonable. A $10,000 investment would grow to $294,750 over 50 years compounding at 7% per year. If an annual fee of 2.37% (60% the median Canadian equity mutual fund and 40% the median Canadian bond mutual fund) were removed at the end of each year, this amount drops to only $96,119. Fully 67% goes to fees! Using bank mutual funds, benefiting from scale and lower fees, the annual MER would be about 1.71% (Globe Investor). In this case, the investor is left with $131,630. Better, but still 54% of the return goes to fees.

Consider the three model portfolios below with MERs of 0.17% (Global Macro), 0.18% (Core Satellite), and 0.15% (Constant Risk). Adding 1.00% for the advisor and using the most expensive of the three for a gross annual fee of 1.18%, the investor’s share after 50 years is $169,195. The investor keeps 59% of his or her own money, a far better proposition. It may also be better for the advisor based on his or her grid.

A self-directed investor would have to pay commissions, but if we assume 0.2% MER, the advisor would keep $268,264 with only 9% going to fees.

If this portfolio belonged to you, your children or grandchildren, which approach would you recommend?

Why diversification?

Diversification is the investment industry’s primary tool for combating risk (volatility); most of the time it works, smoothing returns and bumps along the way. Famously however, it fails when needed most, during major crises of confidence when illiquidity trumps it. Diversification works by combining assets whose prices move in different ways from each other; one zigging when the other is zagging. But technology and instantaneous news dissemination has diminished this independent movement. Cross-asset correlations are higher than historical averages although the shocks from the global financial crisis are now five years behind us. “The average level of correlations across asset classes has more than doubled from around 20% in 1990 to roughly 50% over the past five years,” declared Marko Kolanovic and Bram Kaplan from J.P. Morgan. The globalization of financial markets and economies coupled with high frequency trading strategies that more effectively arbitrage inconsistencies and information asymmetry between securities has to be considered a permanent consideration for portfolio managers.