What is Best for Your RRSP?

When it comes to retirement investing, unfortunately many Canadians start a lot later than they should. Sometimes this is because they have short-term financial goals to address, like paying off student debt or saving for a down-payment for a house. But sometimes we delay retirement investing because we just don’t really understand how to begin, we get intimidated, and just don’t want to think about it. So what do we do?

By all accounts, it is quite common for Canadians to set a meeting at our bank branch or other financial advisor to seek advice. When the advisor puts a “balanced fund” in front of us, a single fund made up at its core of stocks and bonds, it all sounds quite reasonable. Balanced funds are quite popular, according to the IFIC Investment Funds Report 2022, Canadians have put around $1 trillion dollars into “balanced” funds.

But is a balanced fund the most appropriate investment for our retirement accounts? What is the best thing to do in our RRSPs?

To start answering these questions, here are four key attributes of balanced funds to consider:

1. A mix of asset classes: a balanced fund is a single investment fund that contains more than one class of investment. Typically, a balanced fund will contain at least an equities component (stocks) and a fixed income component (bonds). Some balanced funds add in other asset classes like commodities and private equity and do so in the name of diversification.
2. Fund of funds: it is also common that balanced funds are made up of other funds, also known as a fund of funds model. Typically, the funds inside of the balanced fund are all managed by the same company, but not always.
3. Management approach: The majority of balanced funds in Canada are made up of actively managed underlying funds. “Active” management means that the portfolio manager is trying to select specific securities for the fund so that the fund beats its benchmark index.
4. Asset allocation: balanced funds may also be referred to as “asset allocation funds”. The term “balanced” is mostly reserved for asset allocation funds where the equity component is 50% and the fixed income component is 50%, but these allocations can be in any combination. Depending on what a financial advisor assumes is your risk tolerance, you may be offered a fund with a larger or smaller equity component.

Based on these four attributes, here are four questions to consider when evaluating if a particular balanced fund is right for you:

1. Mix of asset classes: are there several different asset classes within the balanced fund, and what impact does this have on fees charged to you? Are the extra asset classes providing value or are they a sales gimmick?
2. Fund of funds: are there fees in the underlying funds that have an impact on your total fee exposure?
3. Management approach: how do the fees compare between the active managed balanced fund and alternative index-based solutions? Are you aware of the track-record of actively managed funds vs. benchmark indices? Read more about that here.
4. Asset allocation: is the fixed allocation of the balanced fund aligned with your goals? When you are investing for retirement, your allocation should be taking your retirement timeline into consideration. Read about goal-based investing here.

You’ll notice that there is a lot of talk about fees above. That’s because fees can have such a massive effect on your performance. You can read more about the fee effect here.

In the absence of alternatives, many balanced funds will seem quite sensible. But alternatives do exist, most with much lower fees and an evidenced based approach to investing. They are:

1. Asset Allocation ETFs
   
   Asset Allocation ETFs are available as index-based funds and are low-fee alternatives to traditional balanced funds. Asset Allocation ETFs are available in an array of risk-profiles that are likely to match any balanced fund you might be considering. If you are taking a fixed allocation approach, and have read the articles linked above about active vs index investing and investment fees, it is hard to argue against these great products.
   
   
2. Robo-Advisors
   
   Robo-advisors also offer a fixed allocation approach at fees that should be lower than the average balanced fund. Like Asset Allocation ETFs most robo-advisors take the index-based approach, however the fees on Asset Allocation ETFs are lower. With Robo-advisors the extra fees would be paying for some ease of use. Once set up, you can have money automatically transferred to a robo-account, and then have every penny invested immediately. With ETFs, you can set up automatic transfers to a direct investing account, but you would still have to place the trades to invest your money.
   
   Robo-advisor platforms typically use the fund of fund model in their portfolios, and those funds are from third party providers. The underlying funds will have fees that you will need to consider as additive to the fees charged by the robo-platform.
   
   
3. Target-Date Funds
   
   Target-date funds are available as mutual funds, and you can expect the average fees to be roughly the same as the average balanced fund, however Canadians now have access to target-date ETFs. The Evermore Retirement ETFs are the only target-date ETFs in the world with fees below the average target-date or balanced mutual fund.
   
   If you’ve read up on goal-based investing via the link above, then you have come to understand that a fixed allocation is not necessarily appropriate for your entire retirement investing journey. When you are younger, you can withstand the greater volatility of equity markets and take advantage of their higher long-term returns. As you get closer to retirement, the period where you have to be selling investments every year to pay for expenses, you will need to lessen the volatility in your portfolio by reducing equity exposure and increase exposure to diversified fixed-income. Target-date funds do this for you, that’s why the Evermore Retirement ETFs are built for retirement investing in RRSPs and TFSAs.
   
   The Evermore Retirement ETFs also have lower fees than most robo-advisors. We also use the fund of fund model, but have kept our portfolios focused on highly liquid ETFs from Blackrock, Vanguard, and BMO with average underlying fees less than ten basis points.
   
   With the Evermore Retirement ETFs, the fees will be higher than most Asset Allocation ETFs. With Asset Allocation ETFs, you will most likely have to be considering your exposure and timeline and making changes throughout your investment horizon. But by using an Evermore Retirement ETF that is aligned closest with your retirement year, you may never have to change investments in your retirement account again. As you invest for retirement, you just invest in the same Retirement ETF every year, and in retirement, if necessary, you just sell the amount you need every year. Target-date funds are an easy way to invest for retirement, and the Evermore Retirement ETFs are the only low-fee, target-date ETFs in the world.
   
   To find out more about which Evermore Retirement ETF is right for you, click here.

Disclaimer

This article is for information/educational purposes only and must not be construed as specific financial or investment advice. Where relevant, consult a licensed professional financial advisor for help tailored to your specific circumstance. Commissions, trading fees, management fees and expenses all may be associated with an investment in exchange traded funds (ETFs). Please read the prospectus before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.