Using a Robo-Advisor Could Cost You $1,000,000 in Lost Retirement Income

Advice and Retirement Income Study

By Dave Faulkner, CEO of Razor Logic Systems
March 6, 2018

As more Canadians are looking for guidance on the best way to save for retirement, one common piece of advice involves the cost of investment fees and the potential impact high fees can have on the size of your retirement nest egg.

Over the past few years, many new direct-to-consumer digital investment platforms, or robo-advisors, have entered the Canadian market place with the mandate to provide access to professional investment advice at a cost well below what traditional investment firms and financial advisors charge.

To highlight the value of robo-advisors, case studies have been published claiming the average Canadian investor could save over $300,000 in needless fees over an investment lifetime. But just how realistic is this conclusion?

How Do Fees Impact After-Tax Retirement Income?

In our “Advice and Retirement Income Study”, we wanted to understand the impact all related fees could have on the after-tax retirement income of an investor in today’s dollars, adjusted for inflation.

We profiled an average married couple age 50 with an annual income of $100,000 each, total investments of $370,000 and annual contributions of $12,400. Click here to read the full study.

We started our study by calculating the potential after-tax retirement income they could expect if they earned a rate of return ignoring all fees. Using this as the baseline, we then subtracted the average fee charged by robo-advisors.

In our baseline, we calculated the maximum annual retirement income starting at age 65 to a life expectancy of age 95, as $81,500.

Next, we reduced the rate of return by 0.75% to account for the average fee charged by a robo-advisor, lowering retirement savings by $116,000. Assuming the same $81,500 in spending, they would run out of money at age 87 when the baseline analysis still had $1,000,000 of investment assets.

Investing Costs Money

Although our study suggests that using a robo-advisor could cost you $1,000,000 in lost retirement income, it is important to acknowledge that it not easy to invest without paying some amount in fees. We just wanted to point out that all investing platforms come with a cost, even low-fee robo-advisors.

Next, we compared our baseline to a traditional brick and mortar investment firm. To begin we further reduced the rate of return earned by 1% to account for the fee charged by the professional financial advisor.

An investment return to 5.0% further reduced available savings at retirement by $141,000. Assuming the same $81,500 of spending, our couple will run out of money at age 82, when the robo-advisor still had $565,000 of investment assets.

Professional Advice Adds Value

In the many articles on investments fees that I have read in the past 2 years, this is where they stop and conclude that high investment fees could cost you $565,000 in lost investment assets.

Not only is this misleading, it suggests that financial advisors do nothing other than paperwork and allocate your money based on a simple risk questionnaire.

Nothing could be further from reality!

A professional financial advisor provides advice on a full range of money related topics. A 2016 study called the Vanguard Advisor’s Alpha calculated the value of an advisor for services relating to portfolio construction was equivalent to 75 basis points, equal to what the average robo-advisor charges. The study also found that the value of an advisor who provides financial planning services was worth an additional 100 to 250 basis points.

Financial Planning Engagement

Financial planning is a process that helps one achieve personal life goals, needs and priorities through the proper management of your financial affairs. After adding the recommendations from the financial plan, savings at retirement increased by over $583,000.

With annual spending of $81,500, our couple had income past age 95, compared to running out of money at age 87 with the robo-advisor.

What we discovered was the financial plan added the equivalent of more than 1.8% to the rate of return, providing a retirement income of $81,800, slightly more than in the baseline analysis.

Too much emphasis is placed on investment fees today, though nobody would deny that fees do make a difference. But low fees in the absence of professional financial planning advice provides little real value to average investors.

For many investors, using a robo-advisor alone, could cost you $1,000,000 in lost retirement income!

4 replies
  1. Steve Bridge
    Steve Bridge says:

    Hi Dave,

    Good article and great to start a conversation on this.

    I’m not sure you can count the portfolio construction as a plus/advantage for the advisor as the robo-advisors also construct investment portfolios. I would call this a wash (and not include it for the advisor), or you can add 75 bps to the robo-advisor, increasing the value for both of them.

    I agree with the assertion that an advisor who provides a comprehensive plan adds 100 to 125 bps. How many advisors actually prepare a comprehensive plan? Most financial advisors in Canada are actually ‘investment advisors’ who are paid to sell investments and not prepare comprehensive personalized plans.

    Comprehensive plans are critical for people to get answers, and I am glad there is software like Razor to help advisors who want to act in the best interests of their clients.

  2. Dan Anders
    Dan Anders says:

    As usual, when the entire picture is viewed, everything changes. For years I have criticized financial columnists who author pieces about the insanity of paying fees for advice and coaching. None of them assume the responsibility to walk the road of life with clients like advisors do. And, almost everyone I know has neither the interest, passion, or knowledge to trade their own accounts, absolutely verifiable. When corporate real estate owners and the dozens of other firms whom we buy goods and services from stop charging me for the privilege of running my practice, I’ll be happy to discuss the fees we’ve charged but haven’t earned. Great article, thank you Dave!

  3. David Brunton
    David Brunton says:

    To Steve, I agree it is a must and not difficult to do whether RAZOR or another software.
    To Dave, well said ! not to mention the other value added advice we provide with our services that can save thousands of dollars in client planning eg, the use of Seg Funds and Life Insurance in Estate Planning.

    This Questrade commercial aired during a TV show I was watching over the weekend and frankly I found it insulting to our reputations, misleading , non-factual, and derogatory with the comments and theme of how they categorically portrayed all account representatives in our industry, whatever employment structure the account representative was that is portrayed, be it an individual, bank, trust company etc.
    How can they air such crap ? Where is the MFDA or IIROC ?

  4. Laura Thompson
    Laura Thompson says:

    Questrade’s commercial is benefiting all ETFs or low cost products. Rather than each individual investment firm spending advertising $ on touting their latest “Fidelity Founders fund” as an example, why don’t they all advertise the merits of using a financial advisor, and managed money? We’ve NEVER had a client come to us and ask for a specific investment, not investment company. Imagine where all the money would go if one of the large investment companies stepped up to defend the advice channel…not only would they have the support of the entire advice channel but also clients who use an advisor and managed money would also take notice! Where is our voice? As an independent financial planner I don’t have a huge marketing budget to defend myself. Would be nice to see someone do so on my behalf.


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