Author: Mike Holman

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.