Is a Robo-Advisor Right For You?

Robo-advisors have become incredibly popular over the past few years, managing hundred of millions of dollars in Canada alone.

They seem to be targeted to millennials who are just starting to invest, but they can also be suitable for retirees who have already built up a substantial portfolio.

If you are comfortable in an online environment, you will find the robo platforms easy to interact with.

What are robo-advisors, anyway?

No one wants to think of their hard-earned money being managed by a robot.  But they are not impersonal in any way.

Robo-advisors are online wealth management firms.  The firms are operated by humans.  You can communicate with a human advisor by email or phone at any time if you choose and they can answer many of your questions.

The “robo” part merely refers to the way the investments are chosen, and the portfolio managed.

When you first sign up with them you answer a series of questions that are designed to generate your financial profile.  A portfolio is built based on a client’s risk tolerance, goals and personal situation. They offer just enough customization to get the average investor set up with a portfolio that matches their needs and their money is invested – all at a low cost.

Then the robo takes over and manages your portfolio for you. Administration is streamlined and routine transactions like rebalancing are automatically taken care of.

What can they do for you?

Most robo-advisors can give you a basic plan. They recommend a basic index ETF portfolio and provide a safe, secure and inexpensive way for your investments to grow.

However, it’s clear that mere algorithms won’t replace quality human advice any time soon. Some robo-advisors are teaming up with financial planning services.

WealthBar is an excellent option for investors who want a personalized financial plan beyond the “basic” plan offered by others. It also assigns a dedicated financial advisor to each client.  They report that retirees make up half its clientele.

NestWealth is a top choice for substantial portfolios.  Each client gets a customized portfolio.

JustWealth also appeals to an older clientele who have larger balances.

Check out other features that may be offered such as estate planning, tax-advantaged ETFs, tax-loss selling and US$ accounts.

What do they charge?

Each provider offers their services a bit differently and charges a slightly different price to do it.  Competition is rising which means costs are getting lower.

There are usually three levels of fees:

  • Advice – 0.5% or less depending on the size of portfolio
  • MER built into the ETFs – average of .25%
  • Trading commission – sometimes included with the advice fee

Some charge a flat rate, others a percentage, and some charge a combination of the two.  You’re probably looking at somewhere around 0.5% to 0.7% of your portfolio annually.

But, don’t just look at fees.  Look for a robo-advisor that best fits your unique needs.

You can do a comparison here.

Are they safe?

Firms are registered with provincial securities regulators as portfolio managers which means they have fiduciary responsibility to their clients.

They are members of the Canadian Investor Protection Fund (CIPF) and are subject to the same regulations as any of Canada’s other financial institutions.

If you prefer the comfort of a big bank, consider BMO SmartFolio, or RBC InvestEase.  They have slightly higher fees but claim to give more personalized service.

The bottom line

Let’s face it.  Most people are not all that interested in managing their investments and doing the research involved. Not everyone needs premium wealth advisory services, but they want or need investment advice.

Convenience and ease of use are major factors in using a robo-advisor.  And it frees up your time if you want to travel extensively, pursue leisure activities or take care of family needs in retirement.

What’s not to like – digital access and efficiency combined with human expertise.

Set it and forget it and chat with your advisor from time to time.





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4 Responses

  1. Paul says:

    Thank you for this article, it provides a good description of this new investment management strategy. While it can be interesting to know the cost of a robo account service, what would be even more valuable to communicate is some performance information. Surely some of these companies offered robo services have some comparative results information available? After all, it’s not what something costs, it’s what it’s worth!

    • Marie Engen says:

      Hi Paul. Good point! Fees are emphasized because we know that cost is a main influencer of an investor’s returns. While all robo-advisors use large index ETFs and adhere to basic index investing principles there are a lot of variables in their strategies including client requirements. Comparing all their returns over a period of time is not easily done. It’s not like they all use the identical components in each of their portfolios.
      I would suggest narrowing it down to 2 or 3 choices based on your criteria and then checking returns with each company specifically.

      • Paul says:

        Agreed, it’s incredibly difficult to compare apples to apples anywhere in the investment paradigm. Furthermore, the time period used is critically important. ETF’s are the stars when everything is making money, while fund managers argue that when things go south, well-managed mutual funds hold the advantage. Logical, but not always true.

        • Marie Engen says:

          Yes, that’s always been the argument against index funds. Right now they’re in high favour because the market has been doing so well for so long. Theoretically, a good team of analysts could beat market indexes. But, all kinds of research proves that there are very few fund managers that are consistently better over time. It’s difficult to find one because the only thing you have to go on is past results.

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