Optimize.ca Review – Save Money On Investment Fees – I’m Not Impressed

by Mike Holman

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I recently heard about Optimize.ca from one of Rob Carrick’s newsletters.  The service launched earlier this month and promises to help Canadians save money on their investments, savings accounts and credit cards.  All this and it doesn’t charge any fees.  They will make money from online advertisers and presumably the recommended brokers that appear if you select the “Invest Now” button.

How it works

Basically the way the site works is you enter your current investment products and the site will suggest lower cost replacements.  It’s an interesting idea, since it can be very difficult for someone who is not familiar with mutual funds and other investments to be able to come up with suitable low-cost replacements for their current high-cost investments.  Things like bank accounts and credit cards are difficult to analyze because there are so many factors to consider.

The key concept behind finding a cheaper replacement for your existing funds, is to find something that has a similar investment mandate (ie Canadian dividend stocks), but has a lower cost.

The site is very slick and easy to use.  Unfortunately, when I started testing it out, the results were not all that good.

Summary

The service really doesn’t work very well.  The problems that I see are:

  • Inappropriate recommendations – The whole point of this service should be to provide similar products with lower fees.  As you can see from my examples below – this doesn’t always happen.
  • One to one replacement – Many mutual funds have different parts – they invest in Canada and the US, or they have equities and some bonds.  Restricting the replacement suggestions to one product is very limiting.
  • Poor matching – More time needs to be spent on analyzing the different products and ensuring that they closely match the original fund.
  • Rankings should be by product match, then MER – It appears that the website comes up with a list of possible replacement products, lists them by increasing MER and doesn’t seem to place much emphasis on how close the replacement product is to the original.

I’m also not sure how many people need this kind of service.  If someone is moving from high-priced mutual funds, typically they have a whole pile of expensive funds and will likely want to start fresh with an asset allocation and few low-cost products.

I’ve included three examples of funds below if you wish to look at the details.  Try out the site for yourself and let me know what you think in the comments.

Example #1

For my first test, I tried out Mackenzie Ivy Canadian Series A, because that was the default value when I first visited the site.  This fund is mostly equities.  According to GlobeFund it is 47% invested in Canada, 30% in US and the remainder elsewhere in the world according to this fund profile.  The MER (management expense ratio) is 2.38%.  From the top holding list, it appears that the fund invests in large, safe  companies.

I selected the “search all” option which means that replacement investment products of all types will be shown.

The first problem is that when it shows you the information for the current holding (Mackenzie Ivy fund), it indicates that you can save a pile of money by replacing your current fund with your current fund.  Obviously this is just a bug that needs to be fixed.

Now let’s take a look at the first three recommended replacements in order:

1) iShares Canadian Completion Index ETF

The Canadian Completion Index ETF (XMD), is made up of small and mid-cap companies that are not in the Canadian TSX 60, which of course is the largest 60 companies.  The MER of this ETF is 0.55% which is indeed cheaper than the 2.38% MER of the original mutual fund.

The problems with this selection are:

  • Company size.  The original fund is mostly Canadian and American large companies – the fund mandate is one of low risk.  The iShares replacement has much smaller companies which implies higher risk.  It’s apples to oranges.
  • Different countries – the original fund was only about half Canadian whereas the replacement index is 100% Canadian.

In my opinion, this recommendation is a dangerous one, because the recommended fund has a different and far more risker investment philosophy than the original fund.  The investor would probably be better off keeping the high priced Mackenzie fund.

2) iShares Canadian Materials Index ETF

The Canadian Material Index ETF (XMA), is made up almost entirely of Canadian mining companies.  Barrick, Potash Corp and Goldcorp make up 39% of this index.  The MER is 0.55%.

The problems with this selection are:

  • Far more specific and risky compared to original fund.  This is basically a mining fund.
  • Different countries – the original fund was only about half Canadian whereas the replacement index is 100% Canadian.

This recommendation is a poor one, for the same reasons as listed for the Cdn Completion index ETF.

3) Claymore S&P/TSX Canadian Dividend ETF

This ETF is in my opinion a much better choice than either of the first two choices for the simple reason that the type of companies in this ETF are similar to the type of companies (big, solid) in the original fund.  The MER is 0.55%.

There is still one big problem with this selection:

  • Different countries – the original fund was only about half Canadian whereas the replacement index is 100% Canadian.

Example #2

Let’s try another fund – how about the huge $13 billion dollar, 2.67% behemoth Investors Dividend fund?  This fund is made up of 85% Canadian equities, 10% bonds and 5% cash.

The suggested replacements are as follows:

  1. BMO Down Jones Canada Ttitans 60 Index ETF.  MER 0.15%
  2. iShares CDN LargeCap 60 index. MER 0.15%
  3. iShares Cdn Composite Index

I think these products are all a good replacement product, but they ignore the fact that the original fund was only 85% equities and the replacements are all 100% equities.  Perhaps it could be indicated on the website that this fund only replaces 85% of the original fund.

Last example – a balanced fund

The last example is a balanced fund – this will contain some equities and some bonds.  I used TD Balanced Income.  This fund has about 50% Canadian equities and 50% bonds and cash.  MER is 2.12%.  In this case I would expect the ideal replacement to be two ETFs or index funds that cover the Canadian equity portion of the fund as well as the bond portion.

The first four replacements were:

  1. Claymore Balanced Income CorePortfolio ETF.  0.25% MER
  2. TD Balanced Index I.  0.84% MER
  3. RBC Monthly Income D.  0.84% MER
  4. CIBC Aggressive Portfolio. 0.96% MER

The first three choices are quite reasonable in that they are good substitutes for the original fund.  They all invest in 50% Cdn equity and 50% Canadian bond and some cash.

CIBC Aggressive Portfolio is an odd choice.  It invests in other CIBC mutual funds. According to the CIBC website, this fund will generally invest in 90% growth (equities) and 10% income (bonds) which goes along with the fund name.  Clearly this is not a good substitute for a 50/50 balanced fund.

It seems that this system is designed to provide 1:1 replacement suggestions.  In this example, Claymore Balanced ETF is a great replacement for the TD Balanced fund with an MER of 0.25%.  Replacements #2 and #3 match the investing mandate of the original fund very well and are much cheaper than the original fund, but with MERs of 0.84% and 0.96% – are nowhere near as cheap as buying two separate replacement products.

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{ 16 comments… read them below or add one }

1 Michael James

I think it’s hard to find one-for-one replacements. It would be much easier to take an entire portfolio of mutual funds and build a replacement portfolio of less expensive products.

2 Squawkfox

As an eye-opener, I actually think this is a pretty cool tool for comparing fund costs. :) It would be nice if the GIC and Savings tools included credit unions like Achieva Financial — where rates are superior to the banks.

3 Mike Holman

@Michael – I agree.

@Squawk – I think the tool has a lot of potential. It just needs work on the data and selection logic. The interface is fantastic.

4 Robert

I disagree with Squawkfox and would add another way in which the “tool” is misleading. I take no issue with comparing costs, but it’s apples-to-oranges when you remove the advice, then compare the cost-with-advice to the cost-without-advice and say: “Look, you’re saving money.” Basically, anyone can fire their advisor and save 1% from their MER. Whether or not they SHOULD do that is another debate entirely, but I don’t think it’s one that Optimize.ca should ignore.

Investors should be fully aware of what they pay for investment management and what they pay for advice. They should also be able to decide whether or not they’re getting their money’s worth.

5 Mike

@Robert – I would assume the tool was designed for people who are not happy with the advice they are getting (or not getting). Your point is valid though.

6 Matthew McGrath

Hi Mike and all!

First off thanks for the review and the feedback – very much appreciated!

Your are absolute correct with respect to the iShares Material and Completion indices not being appropriate replacement funds. This stems from our data suppliers providing us with incorrect investment categories, namely both having been classified as Canadian Equity. Their correct investment categories according to the Canadian Investment Funds Standards Committee (CIFSC) , the Canadian authority on Mutual Fund Investment Classifications are Natural Resource and Canadian Small/Mid Cap respectively. We notified our data suppliers immediately and expect these updates to be effective in the coming days – thanks again for the catch! This will of course ensure that they will only be included as potential replacements strictly within their respective categories. We have tried numerous times to replicate the Ivy Canadian Fund being shown as a replacement fund to no avail. And so, if you continue to see this on your end, please let us know and I would be happy to have one of our IT people in touch to investigate further. Alternatively, you are free to reach me anytime at 416 907-6733.

The examples of Mackenize Ivy Canadian, Investors Dividend Fund are more intriguing as these funds are indeed categorized as Canadian Equity as per the CIFSC but appear to be going well beyond the allowable limits of what can be classified as Canadian Equity as per the CIFSC, again which is the authoritative body on mutual fund classification. As per their rules and guidelines, a fund categorized as having a Canadian Equity Mandate must follow these guidelines:

Funds in the Canadian Equity category must invest at least 90% of their equity holdings in securities domiciled in Canada, and their average market capitalization must be greater than the Canadian small/mid cap threshold.

A similar instance can be found with the CIBC Aggressive Portfolio being categorized as Canadian Neutral Balanced despite the CIFSC’ definition of a Canadian Neutral Balanced Portfolio being:

Funds in the Canadian Neutral Balanced category must invest at least 70% of total assets in a combination of equity securities domiciled in Canada and Canadian dollar-denominated fixed income securities*. In addition, they must invest greater than or equal to 40% but less than or equal to 60% of their total assets in equity securities.

We have notified CIFSC, Mackenzie Financial, CIBC Mutual Funds, and Investors Group as to how these funds can be approved for their stated investment categories despite an obvious breach of CIFSC guidelines. We will certainly keep you abreast of their responses.

Although, it is an easy adjustment to screen based on funds’ asset allocations as opposed to their stated investment categories, it is our belief that relying on how a fund is comprises its asset allocation only as of a certain date poses a significant threat of relying on nothing more than ‘window dressing’ as opposed to relying on how it has legally represented itself in its prospectus, regulatory and other legal filing documents.

The comment/request to provide more than a one-to-one comparison in that rather than just one fund potentially replacing another fund, or rather than a group of funds being replaced by the same number of replacement funds is precisely why we are rolling an additional service with our Online Portfolio Analysis and Monitoring Service in the weeks and months ahead. This service will allow individuals to synch their numerous brokerage accounts and investments to be instantly analyzed as to among other things, their precise asset allocation and geographical allocation across their many funds and ETFs. In addition to seeing their portfolio’s current allocation and even more eye-opening their current annual fees which are being charged by their funds, we will also provide them with a portfolio of mutual funds or ETFs that will provide them the proper asset allocation and diversification irrespective of the current number of funds they are holding. We will in fact provide them with the actual required rebalancing trades on a per account basis which they will then be able to forward on to their current broker or process themselves should they use an online broker. The service will then monitor their portfolio holdings across their brokerage accounts and notify them on an ongoing basis should any re-balancing trades be required.

Again, thank you very much for the feedback and I am always available should someone like to discuss in more detail their thoughts at 416 907-6733.

Matthew McGrath

7 Mike Holman

Thanks Matthew – I look forward to trying out the portfolio analysis tool.

8 Matthew McGrath

Hi Mike – Just a quick note to let you and your readers know that our data providers have corrected the error spotted on your Blog and we have since updated our site accordingly – As well, our online Financial Planning platform will be rolling out sooner than we thought (in the next week or so), so I will let you know when that happens. Thanks again from Optimize (and our data providers) for the great catch on those misclassified investment categories! Talk to you soon – Matthew

9 tom

How do the various funds compare in after expense returns and volatility? Cost is not everything.

10 Matthew McGrath

Thanks Tom for the question! We indeed find you and other users better alternative funds by finding funds with higher returns, lower risk, and lower fees than your current funds. We wholeheartedly agree with you that returns and volatility need to be factored in and that cost is not everything.

11 Naynesh Patel

Any specific date as to when the ‘account viewing’ will be available at Optimize.ca?

Naynesh

12 Matthew McGrath

We’re testing it at the moment and putting on the finishing tweaks. We don’t want to rush the testing phase and so don’t want to put a hard date out but expect it in the States by January and in Canada by February.

13 Rich Wright

Mike – great review. I’m still very puzzled by their recommendations. For TD Canadian Equity A they currently recommend three variations of the same RBC O’Shaughnessy All-Canadian fund. Does it have to do with the CEO’s background at RBC?
I’m also surprised that he is everywhere on the website and the web posting long replies. Makes me think it’s either a one-man show or he is the only one qualified on their team.
In any case, I’d need to see a lot more reviews before I can trust them with my portfolio.

Rich

14 Francois deBare

Hi, Mike

Since there are no dates on this post I’m unclear how long ago you did this review. I’m wondering if you have any further updates or critiques of the optmize.ca website and its advertised services. Thank you.

15 Mike Holman

Francois, the date of the article was Oct 11, 2010.

I corresponded with the founder a couple of times and I believe they fixed up some of the concerns I had.

However, I haven’t visited their website since I did the initial review.

I think their concept of suggesting cheaper or better alternatives can work well for bank accounts and credit cards (which their site does as well), but it just isn’t a useful service when it comes to mutual funds.

In my opinion, most mutual fund “refugees” who want cheaper options, want to get rid of all their high-priced mutual funds and start over with a simpler, cheaper portfolio. They don’t want to switch each of their holdings one for one and replace with cheaper equivalents.

16 Brian Poncelet,CFP

Hello Mike,

The website doesn’t seem to work.

The problem with fees, is it only half the story.
To be a true helpful website. It should include discussion about risk management. Risk management is insurance. Like disability insurance life insurance.

Annuities as an example is an insurance product. A male over 65 can get 6.6% return on his money. This is guaranteed. Taxes may be as much as 30% less. So low fees offers no guarantees and gives no relief on taxes.

Cheers,

Brian

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