Do you know what a Robo-advisor is?
A robo-advisor is a technology company that handles your investments much like a bank does, but with less costs and a lot more control.
This new way of investing your money aims to shake up the financial industry by giving the power back to the investor.
Don’t worry, there are still humans involved in the management of your money. But most of the day to day work is done via financial planning software that is easily accessed through the desktop or free downloadable apps.
Robo-advisors make it quick and easy to invest your money without the need for a financial advisor. In recent years, they have branched out their services by offering high interest savings accounts, tax filing software, and no fee trading platforms.
According to Statista, a market research firm, robo-advisors managed over $8.8 billion in 2020. That number is expected to rise to $24 billion by 2024.
In this article, I will go through the most common questions a beginner might ask about robo-advisor services. This includes how they work, what accounts you can open with them, how much they cost, and why you should consider this type of financial management system.
I will briefly list the pros and cons of the industry. I will close by giving you my perspective on robo-advisors and why I use one for my own investments.
How long have they been around?
Robo-advisors have been around in Canada since 2014. While they are relatively new, their popularity has grown as investors look to low cost services to help manage their money.
In fact, many of the robo-advisor algorithms are based on Nobel Prize-winning investment theories that have been well researched prior to implementation.
In recent years, many major banks have even begun to operate their own robo-advisors in addition to their traditional investing services.
How does it work?
Setting up an account with a robo-advisor is very easy. While there are many options within Canada and the United States, they all follow a similar format to open an account. The two most popular companies in Canada are WealthSimple and Questrade.
You start by answering a few questions about your investment knowledge and level of risk. Afterward, a computer algorithm recommends an investment portfolio for you that matches with your investing personality.
Commonly, they have levels of low, medium, and higher risk categories. Although, you are ultimately in charge of what risk level you want to take.
From there you can choose to open popular registered accounts like the TFSA, RRSP, or RESP. Non-registered accounts can be opened as well. But remember that they will be subject to taxes on capital gains if sold.
Next, based on your investing personality, the algorithm will assign certain ETFs that fit with your goals and risk level. While the ETFs used for each account may look similar, their percentage of stock and bonds might vary.
For example, an investor will see her portfolio made up a few diverse ETFs like US and Canada based equities, foreign equities and bond ETFs.
A low risk investor will see a higher percentage of their account dedicated to fixed investments like government and corporate bonds rather than equities. A higher risk portfolio will concentrate more on stocks than bond EFTs.
You can open up a new registered investment account with a robo-advisor or have an existing one from another financial institution transferred over. The process is very easy and if you need help, the robo-advisors are always there to lend a helping hand with real human support.
For instance, you can easily transfer a TFSA from any major Canadian bank over to a robo-advisor by filling out a simple form. In many cases, the robo-advisor will reimburse any fees that are incurred due to transferring accounts as long as they meet a certain dollar value.
Finally, you can view the day to day information about how your investments are doing from a desktop website or a convenient app. Most robo-advisors are quite transparent and you can see the performance of your portfolio, the fees that you are paying, and even how much you receive in dividends on a monthly basis.
Simply put, A robo-advisor can invest your money just like you might have someone at a bank do for you.
They make it very quick and easy to understand how your money will be invested and the platforms are often very transparent. Company financial advisors are available to answer your questions through phone or email very easily.
There are indeed very big reasons why it might be better to use a robo-advisor over a traditional investment service. There are a few options out there for Canadians to investigate to make sure it fits with their needs.
What does it cost?
Investing your money with a traditional financial advisor at a major bank can cost you upwards of 2% of your assets. For example, if you have a TFSA with a bank that has $50,000, you are charged $1000 per year to have them invest your money. That is also only before any additional fees are charged to service your account.
An average robo-advisor can charge you between 0.3% to 0.5% of your assets to manage your account. There is also a cost to purchase the ETF’s in your portfolio that can run from 0.1 to 0.2%. That would bring the “all in” cost for their service to around 0.7%.
On that same $50, 000 account, you would only be charged $350. That difference is huge!
As your portfolio grows, so does the fees charged to service it. Over a lifetime of investing, using a robo-advisor could earn you hundreds of thousands of dollars extra in appreciated earnings just for minimizing your investment fees.
What accounts can I open with one?
Most Robo-advisors will let you open up all the accounts that any major bank handles for you. That list includes but may not be limited to:
- Non-registered accounts
As mentioned above, you can transfer existing accounts over from other companies or open up brand new ones with a robo-advisor. Just make sure you do not go over you limits if you do choose to have multiple accounts in more than one place.
Different services may require a certain deposit level while others, like WealthSimple, have no minimum investment level to begin.
Who is this designed for and who is it not?
Robo-advisors are made for every investor in mind. While it seems that a larger portion of millennials seem to use the service, it is suitable for those just starting out as well.
The younger generations have adopted FinTech (financial technology) more easily than older ones. Although older investors will find the services easy to use, their investing timeline may different and require a different level of planning.
As the implementation of financial services moves online, younger investors want a hassle-free investing experience where they can make use of technology with assurances that a human hand is not far away if need be.
These investors tend to have a longer investing lifetime where they may not need their money for decades.
Those that may not find a robo-advisor suitable:
- Individuals with complicated investment requirements
- High net worth investors with varying investments
- Risk adverse investors who need the help of an advisor to navigate their money
- Those closer to retirement who may need to make use of their investments in a shorter period of time
Is my money safe with a Robo-advisor?
The answer is yes. Robo-advisors like WealthSimple are registered with the CIFP (Canadian Investor Protection Fund). It’s a non-profit insurance program established by provincial and territory securities commissions. Basically, this program protects you from losing money if your robo-advisor goes bankrupt.
In the event that you need to transfer money away from a robo-advisor, you can do so like you would with any major bank or financial institution.
Why should I consider using a robo-advisor?
The quick answer is because its easy to use and it costs less than a traditional bank that most people use to invest their money.
Over an investing lifetime, investment fees can reduce your returns by thousands of dollars. By using a robo-advisor, you reduce the fees paid to service your accounts by using low cost ETFs.
These ETF’s that mirror the most common stock market indexes like the S&P 500 cost less and earn higher returns compared to most actively managed mutual funds.
Moreover, many people rarely see their financial advisors save for a yearly checkup. Unless that advisor is providing more than just investing services like tax or estate planning, you might be overpaying for your investment services.
Pros and Cons of Robo-advisors
- Low fees
- Automatic deposit set up
- Hands off management. Set it and forget it.
- Automatic rebalancing
- Easy to set up and transparent operation
- Makes use of app’s for easy access
- Ability to have direct contact with financial advisors when needed
- No face to face interaction
- Mostly limited to investment services only
- May lack more in- depth customization
Robo-advisors are relatively new to the Canadian investment landscape, but are gaining popularity year after year. As investors look to lower-cost investing services that make it easy and transparent to understand, this trend will continue to grow.
Although the majority of personal investments are still under management by big wall street firms, robo-advisors do provide a valuable alternative to those looking to manage their money on their own. It doesn’t take very long to research why index funds outperform mutual funds and it will save you a lot of money.
Personally, I use WealthSimple for a portion of my investment portfolio. I had transferred my registered accounts (RESP, TFSA, RRSP) away from a major bank after finding that the MER (management expense ratio) that I was paying was 2.35%.
By moving my own investments over to WealthSimple, I was able to reduce that fee to under 1%.
That means that over time, I will be saving thousands of dollars in management fees that can be used to toward more investments growing my retirement nest egg.
I also found that I did not receive any value from my financial advisor. While he was a nice guy, I would only see him maybe once a year and it was purely for the administration of the account that was required by the bank to make sure I still agreed with their investment plan.
As I learned more about how my money was invested, I realized that I could manage the money on my own and make superior returns. I am a big proponent of index investing.
The data does clearly show that investing in low cost index funds produces higher returns for the investor than actively managed mutual funds. This is primarily due to lower fees.
I use Wealthsimple’s Roboadvisor platform for the following reasons:
- Lower Fees than banks
- Automatic rebalancing of assets to keep with your financial plan
- Ability to invest for registered accounts like TFSA, RESP, RRSP, and LIRA
- Easy to use App with security features like two-step authentication
- Easily access financial advisors when needed
- Transparent platform that shows important data in a very easy to understand manner
Those looking to lower the cost of their financial management should look into robo-advisors. You will save a lot of money in lost fees over your lifetime.
What do you think of Roboadvisors? Do you think they can help you?