No, we aren’t talking about Will Smith’s next robots-are-the-best-things-to-happen-to-mankind-but-suddenly-turn-evil movie when we say “robo-advisors”. What we are talking about is probably one of the most significant revolutions in the financial world!
Gone are the days when you could just put your money into a traditional savings account and patiently wait for returns. The cost of living around the world isn’t decreasing, so these kinds of traditional returns just don’t cut it when you consider the average financial goals of an average investor today.
What’s the alternative? Earlier, it was to either take matters into your own hands or submit wholly to a financial/portfolio manager or banking representative. Considering that most of us aren’t Warren Buffet, the former option presented a world of risk, time consumption, investment of quite a bit of effort and continuous monitoring of the market. The latter, though it came with professional advice, was mostly restricted to investment in mutual funds. More importantly, it also came with the price tag of an arm and a leg, by way of brokerage fees, account fees, transaction fees and a whole other range of fees you probably don’t even understand the need for! So what do those of us who aren’t Bill Gates do?
Cue entry for robo-advisors! No, these guys aren’t robots; they’re companies that customize portfolios for you that reflect a variety of factors, such as your risk appetite and financial goals, using algorithms. This is the basic definition, but we’re going to delve fully into what robo-advisors are, how they work, where your investment goes, why you should pick a robo-advisor and a clash of the robo-advisor titans in Canada. Read on for Robo-Advisor Canada 101!
As mentioned, a robo-advisor is a company that invests your money for you by building a customized portfolio that is based, more or less, on your risk tolerance.
The investment happens automatically and your money is invested in exchange-traded funds or ETFs (more on them later!). As we also said, robo-advisors aren’t robots. The word “robo” refers to the automation of the investing process, using several investment models, with Nobel Prize winner Harry Markowitz’s Modern Portfolio Theory (MPT) being the most commonly used. Robo-advisors run on the premise of asset allocation prioritization as opposed to a focus on individual stocks.
Robo-advisors cropped up during the worldwide 2008 financial crisis but the big break only came in 2013, when robo-advisors starred in Jon Stein’s Betterment, the world’s first robo-advisory service for the everyday investor. What started off as a unique service spread far, wide and quickly; today, nearly a hundred robo-advisory companies are managing over $60 billion worth of clients’ assets. With the number expected to hit $2 trillion by 2023, it’s pretty clear that robo-advisors are the next big thing in the financial world. With good reason, considering how expensive investment can be, especially in Canada, where the good people spend ridiculously exorbitant amounts on taxes and fees.
Therefore, robo-advisors eliminate the need for face-to-face meetings with representatives without compromising on the quality and efficiency that accompanies a good portfolio. The process, like most things in the world today, is entrusted to the safe, reliable hands of technology and the fact that they are much cheaper than traditional portfolio managers obviously doesn’t hurt at all!
Therefore, in a nutshell, robo-advisors are wealth management services that use algorithms to build your portfolio (reflecting your risk tolerance and financial goals), invest your money in ETFs, and continuously balance your portfolio to align with your risk tolerance and financial goals.
It isn’t as though robo-advisors do something extraordinarily different from financial advisors who are actual people; both use MPT to build your portfolio. The difference, though, lies in the fact that the latter will more likely invest your money in mutual funds and individual stocks, whereas the latter invests it in ETFs that it deems favorable to your time horizon, goals and risk tolerance.
Robo-advisors work on digital platforms where they gather the required information from clients (through questions or questionnaires that they answer) to build them customized investment plans, factoring in aspects such as financial goals, time horizon, risk appetite, and income. Once the plan is made, the process of asset allocation is started, wherein the clients’ assets (generally a monthly investment of an agreed-upon amount) are split and allocated to various assets; the higher the risk tolerance, the more volatile the instrument (“high risk, high return” instruments) invested in and vice-versa. Portfolios are continuously balanced and readjusted when they seem to misalign with the client’s profile.
Succinctly put, robo-advisors will give you the following services:
- Simple advice, with the opportunity to interact with human representatives via email, chat, Skype or phone call, if and when required
- Exposure to a wide range of ETFs
- User-friendly interfaces (apps and websites)
- Automatic rebalancing of your portfolio
- The ability to use different accounts for investment, such as TFSA, RESP, RRSP and the like
- Fees paid may be much lower (around 1% or less) when compared to traditional advisors (3% or more), meaning more of your money is available for investment
That being said, do keep in mind that robo-advisors work on general asset allocation, considering a wide range of scenarios. Therefore, they aren’t customized down to the tiny specifics, but on a basis that generally works for your profile; you’ll find this level of customization only in human advisors as they work with your in-depth profile as opposed to basic numbers and minimal information. Getting rich overnight is also much harder with robo-advisors; they work better for passive investors.
However, unless you’re a seasoned investor, robo-advisors are great starting points for those who are just entering the big, bad world of investment. If you’re a beginner looking for long-term investment solutions, robo-advisors are the way to go.
We’ve been mentioning ETFs a lot, but what exactly are they and why should you be comfortable with them as the chosen instruments? Well, ETFs are a much cheaper option when compared to mutual funds and one that allows you to invest in a variety of indices, which translates into more diversification of your risk and your portfolio. Not only are they cheap, but they’re also easily tradeable in the financial market; they are easily bought and sold on the exchange.
What ETFs do is that they act as a basket holding a variety of instruments together, such as bonds, commodities, stocks and the like. This is one of the reasons an ETF works out cheaper; you can just buy one ETF and have a variety of instruments in your hand as opposed to individually buying the instruments. In the case of the latter, you’re paying higher trading costs and for more managers to manage each instrument. An ETF only requires one manager. A bag of assorted chocolates or individual packets of the different chocolates in the assorted bag? You get the drift!
A few more advantages of ETFs are:
- No minimum investment required, unlike mutual funds
- Like stocks, ETFs can be bought and sold at any point of the trading day, whereas mutual funds are only traded at the end of the day.
- More tax-efficient and cheap
- The option of short selling and using limit and stop loss orders
Every coin is double-sided, so remember that with ETFs, you’ll still be subject to brokerage fees, transaction fees, and the lack of automatic reinvestment of dividends that mutual funds offer (reinvestment requires an additional fee). However, that’s why robo-advisors are a great option; these guys will do most of these things for you at a reduced price.
Of course, you’ve probably wondered whether you really do need a robo-advisor. If any of the following cases relate to you, you may just be better off picking a robo-advisor over a financial advisor or doing-it-yourself!
- If a cheap option and not having to pay high fees to wealth management institutes are your priorities, robo-advisors are the obvious answer.
- For an investment capital less than $250,000, a robo-advisor is recommended.
- If you want to follow an “invest and forget” approach in your investment, with minimal engagement and monitoring on your part, choose a robo-advisor.
- If you don’t mind the lack of face-to-face interactions and are comfortable trusting technology with your funds, say “yes” to robo-advisors!
- Robo-advisors deal in low-risk, low-cost ETFs, which means your returns will be slow and conservative, though they will be consistent. If you have the patience for this, then you know who to pick!
Remember, you’ll still be paying for the Management Expense Ratio (MER), anywhere between 0.2% to 1.22%, based on whether you pick a Private Investment Portfolio or traditional ETFs, and also how much you’re investing.
If you do choose a robo-advisor, look for the following features:
- Low fees
- Compatibility with a variety of accounts (TFSA, RRSP, RESP, joint/corporate/personal savings accounts)
- A low amount for “account minimum”
- Efficient customer service
- Freedom to choose where your funds are invested (in-house funds, ETFs, F-Class funds and so on)
- Look for a high amount of assets under management (AUM); the higher this number, the higher the company’s stability
- Promotional offers
- Various services such as direct indexing and tax-loss harvesting
The truth is yes, you can do quite well for yourself without a robo-advisor. You could open a discount brokerage account and invest in the listed ETFs as per the institute’s recommendations.
However, if you’re the kind of person who likes to enjoy the fruit without having to harvest it (and let’s be honest, we all are, to varying extents!), you know you need to look no further than robo-advisors. Though you’ll be paying a little more by way of management fees (still lesser than what you’d pay a financial advisor), it’s well worth it for all the work the robo-advisor will do for you. Also, let’s be completely honest — how many New Year resolutions did you make that you actually kept? Unless you’re dedication personified, chances are that you’ll slack off at some point when you take matters into your hands. It’s a basic human tendency! Additionally, the fact that the first step in investing is the hardest doesn’t make it any easier, just as the manual rebalancing 2-4 times a year, the manual ETF evaluation, and the manual asset allocation, all don’t.
And that’s why robo-advisors exist. They free up your time, use reliable methods of tested investment models, and get you returns, all without burning a hole in your pocket.
Some of the other pros of robo-advisors are:
- MER of 2.5% or lesser.
- Due to the concept’s relative novelty, many robo-advisory services offer great offers and promotions.
- Low threshold limits
- Easier and more convenient
- The higher your investment, the lower the fees you’ll pay.
A natural question, especially if you’ve subjected yourself to the many Terminator movies. Bad jokes apart, what you essentially want to know is if your investment is safe. Long answer short, yes, it is as safe in the hands of a robo-advisor as much as the next investment, and little more than those in the hands of a human advisor.
The funny thing about investments is that they fluctuate, which is why robo-advisors use ETFs to diversify your risk. You have investments in a wider portion of the market due to the various instruments, so your returns improve with the improvement of the market. Even though there are worrying periods, the long-term trends indicate that the market always recovers.
To further compound how secure they are, all robo-advisors in Canada are members of the Canadian Investor Protection Fund (CIPF), essentially insuring your investment against (the rare occurrence of) dealer insolvency. Add to this that the investment methods used are all tried and tested for decades now on the majority of investors with positive results, and we have a winner! Robo-advisors are also subject to fiduciary standards, meaning your interests will be the top priority.
No investment is 100% safe, but investing with a robo-advisor keeps your precious funds safer than they would be in the hands of a financial advisor or even your very own pocket.
If you’re looking to switch from a traditional advisor to a robo-advisor, here’s a list of robo-advisors to consider.
Though they stole hearts everywhere with smart marketing and a great website, these aren’t the only reasons that Wealthsimple boasts 230 employees, $4 billion AUM, 120,000 clients worldwide, and offices in Europe, Canada and the USA. This effectively makes them Canada’s largest robo-advisor, meaning that these guys more than know what they’re doing.
The company doesn’t ask for a minimum investment account nor any eligibility criteria for account-opening. Pricing is as follows —
- Basic accounts, with deposits up to $100,000 are charged a fee of 0.5%
- Black accounts, with deposits between $100,000 to $500,000 are charged a fee of 0.4%
- Generation accounts, with over $500,000 in deposits, are charged a fee of 0.4% and come with a range of additional perks
What makes Wealthsimple a great option:
- Free tax-loss harvesting (non-ETF purchases) and financial goal-planning are a few of the many features they offer
- The option of holding a savings account
- The option of interacting with human advisors
- Experienced company
- A wide range of investment options, including uncommon ones such as Socially Responsible Funds or Halal Funds
- MER of around 0.20% charged on a total cost of 0.60-0.70%
Though you end up paying a higher amount of fees than most other robo-advisors, Wealthsimple is still a great option to consider. They also don’t offer many unique financial tools and have limited options when it comes to portfolios, but beginners are sure to benefit from the platform.
Nest Wealth is one of the most popular robo-advisors in Canada. One of the biggest advantages with the platform is that as opposed to a proportional increase in your fees along with an increase in your investment, Nest Wealth charges flat rates of $20, $40, or $80 each month, depending on your account size. This means that even if your portfolio size exceeds $150,000, you’ll still be paying only $80 per month as management fees.
Additionally, Nest Wealth keeps all its accounts at a major bank, being the only robo-advisor in Canada to do so. Not only is your money protected, but you also enjoy the resources and facilities of a large bank with the specific attention of a small concern. Each customer using Nest Wealth gets a customized portfolio.
Nest Wealth also has many takers for its efficient combination of blue-chip ETFs, with an amazingly-low average expense ratio at about 0.13%. Though you’ll still have to pay expense ratios and transaction fees to third parties, the amount you save is super significant, especially with a large portfolio.
Other features include:
- Experienced managers
- A cap on yearly third-party trading fees at $100, regardless of portfolio size
- Regular portfolio rebalancing
- Compatibility with a range of different registered and non-registered accounts
- Fixed management fees — $20 a month for portfolios under $75,000, $40 a month for portfolios between $75,000 and $150,000 and $80 a month for portfolios above $150,000
- No minimum investment amount required
However, Nest Wealth’s main focus is on conservative investments, making mature investors looking at saving for retirement their main target audience. (This doesn’t mean they’re inaccessible or insensitive to the needs of a younger demographic, though).
Though Nest Wealth’s pricing model is great for large portfolios, it can bleed out quite a bit of smaller accounts. Additionally, due to their conservative approach, not many high-risk ETFs are included in the portfolios.
For those who aren’t completely comfortable giving up human interaction, the BMO Smartfolio is the perfect hybrid option. An offering from the Bank of Montreal, Canada’s oldest bank, the Smartfolio has a credible backing and weight to its name.
The BMO Smartfolio approaches investment uniquely, thanks to being a hybrid service. Investors get the best of both worlds with “smart beta” ETF-investment and continuous monitoring and rebalancing of the said investment portfolio (around 4 times a year) by a team of human advisors.
It is important to note that SmartFolio has a minimum threshold amount of $1,000 and they charge you an advisory fee on account-opening. This fee excludes the MER, which works out to 0.20-0.35%, and is charged on a quarterly tiered-average basis, calculated on your portfolio’s entire value. This means that the more you invest, the less you pay by way of fees:
- 0.70% on the first $100,000
- 0.60% on the next $150,000
- 0.50% on the next $250,000
- 0.40% on anything above $500,000
Some of the other features we like are:
- The possibility to group accounts by household, resulting in much lower fee amounts
- The combination of machines and humans
- Experienced players in the field
- Compatibility with a range of accounts
- The company pays any transfer charges you may incur while transferring your investments from another financial institution.
- An introductory offer of managing $15,000 free
However, the fees are significantly high and the hybrid combination may be a turn-off for those looking for an authentic robo-advisor.
WealthBar is Canada’s first fully-fledged robo-advisory service. It was launched in 2014 and currently holds over $275 million as AUM. The company also offers unlimited access to its human advisors as well as low-fee investment and portfolio management online. You’ll need a minimum of $1000 to open an account and the prices are as follows:
- 0.60% per year for the first $150,000
- 0.40% per year for portfolios between $150,000 and $500,000
- 0.35% per year for any portfolio above $500,000
There is also an additional MER charge of 0.19-0.26%, though SRIs are charged higher at 0.29-0.37%. Considering the broad range of investment options, unconditional access to financial advice and a great reputation, the fee seems justified.
Another thing about WealthBar that we totally dig is the ability to add Cleantech to your portfolio, where 5% of your funds go into the company’s PowerShares PZD, an environmentally-conscious fund that doesn’t compromise on performance. You can also opt for a Private Investment Portfolio to diversify your portfolio, though this comes at a higher price.
Some of the noteworthy features:
- Wide range of planning tools and investment options
- Experience of over 40 years in asset management
- Personalized portfolios
- First $5000 managed for free; post-this, you’ll be paying between 0.35-0.60%
- Tax-optimized accounts
- Access to Nicola’s Wealth Management pools, which would otherwise require an investment of $1,000,000
- The only robo-advisor to offer RDSPs for account holders
- Compatibility with a range of accounts
Despite the account minimum and the relatively high ETF and management fees, WealthBar is a must-consider.
Justwealth has one of the most massive selections of portfolios, with over 70 portfolios based in more than 40 ETFs. On signing up, investors are assigned a portfolio manager and can pay an additional sum to avail services such as portfolio reviews and financial planning. Various accounts are supported by the robo-advisor and fees are charged as follows:
- 0.5% for deposits below $500,000
- 0.4% for deposits over $500,000
- $4.99 monthly fee for portfolio sizes below $12,000
The service charges an additional MER of 0.25% and provides a $1 million insurance in collaboration with BBS Securities, Inc. Justwealth is particularly popular for its target-date RESP.
Some things that work for Justwealth are:
- The huge selection of ETFs and portfolios
- A very direct pricing model
- The option of receiving personalized advice
- Specialization in target-date portfolios
- A variety of non-registered and registered accounts available
- Experienced management
- Tax-efficient methods of investment employed
Users have complained of a website that isn’t as user-friendly as those of other robo-advisory services. Additionally, the minimum investment of $5,000 is relatively high (though you don’t need a minimum amount for RESP accounts).
If you’re looking for one of the smartest robo-advisors in the market, ModernAdvisor may be it. With CFA charter holders designing your portfolio, smart-index low-cost ETFs, and efficient technology being employed to meet your investment goals, the robo-advisor is efficient and advanced. It’s also quite moderately priced, with fees ranging from 0.35-0.50%, with no hidden costs of any kind and a focus on their fiduciary duties. The MER works out to 0.06 to 0.56%, depending on the account size.
Investors have the option of opening two types of accounts with ModernAdvisor — the ModernAdvisor Digital (robo-advisor) and the ModernAdvisor Personal. The former uses a robo-advisor and charges the following flat rates:
- Free of cost up to $10,000
- 0.50% from $10,000 to $100,000
- 0.40% from $100,000 to $500,000
- 0.35% from $500,000 to $1 million and above
With the latter (the personal advisor), the rates are as follows:
- 0.89% for the first $500,000
- 0.79% for the next $2,000,000
- 0.69% for the next $2,500,000
- 0.49% for the next $5,000,000
- $75 per month as minimum fees
Some of the other features of the robo-advisor are:
- The option of choosing between a personal advisor or a robo-advisor
- Prioritization of Socially Responsible Investing
- A super-experienced and qualified team
- The first $10,000 managed for free
- The Springboard program (demo account) for online investing practice
- Free analyzer tool for mutual fund and ETF comparison
- A diverse range of asset classes for investment, including REIT, stock and bond ETFs
- Tax-advantaged and non-advantaged accounts available
Though it may seem like the pricing is super competitive, the competitiveness only kicks in when you hit $500,000 in investments. They also don’t seem to be super responsive to customer queries, preferring that you use their FAQ section or blog (which isn’t updated regularly) instead.
Where Mylo stands out is that it is aimed at short-term financial goals, as opposed to the long-term goals that other robo-advisors aim to achieve. It fulfills your short-term goals in a truly unique way — it links to your credit or debit card and rounds up all your purchases to the nearest dollar! That vacation you’ve been dreaming of may just become a reality!
The service lets you set a target and the date by which you wish to achieve this target. Once a week, your rounded-off spare change is automatically invested in low-cost ETFs that match your profile. It’s also super affordable, with its basic plan only costing a dollar per month. The Mylo Advantage account will cost you $2 and comes with perks such as RRSP and TFSA account options and free-of-cost next-day withdrawals.
Some of its winning features include:
- Easy-to-use app
- Simple premise
- Great for beginners
- Highly affordable
- Includes Socially Responsible Investing (SRI)
Not only does Planswell offer low-cost services, but it also includes insurance and mortgage in its service. The robo-advisor boasts over 17,000 financial plans with a range of accounts on offer, including RRSP, TFSA, RESP, RRIF, LIRA and non-registered investment accounts (joint and individual). Their fee structure is pretty straightforward, with a 0.5% fee on portfolios below $99,999 and a 0.4% fee on anything above $100,000.
Some of its noteworthy features are:
- Free financial planning that is tailor made for the investor
- 0.40-0.50% per year as service fees
- Low-cost ETF portfolios
Robo-advisors are a great way to ease into the world of finance and investment; not only are they reliable and customized for you, but they also don’t destroy your savings or wallet by way of fees and charges, at least to the extent that other traditional services do. It’s also a great option for those who just want to invest money and get returns, without having to do any of the legwork. The robo-advisor does all that for you, from gleaning your investment information, creating a customized portfolio, allocating assets suitably, and even automatically rebalancing your portfolio if it should go off track!
What makes it even better is that you can start off with robo-advisors even with a low investment amount, whereas with mutual funds, investments are typically larger. Additionally, most traditional advisors only work with large portfolio sizes, which makes them pretty exclusive. Even if they do agree to take on a small portfolio, the investor will probably end up paying an amount higher than their portfolio size as fees! For relativity, banks will charge you up to 2.35% or higher as management fees per year, whereas robo-advisors generally charge between 0.35-0.70%. That’s quite a bit of saving!
With more money available for investment due to the lower fees, does that mean robo-advisors beat traditional advisors? Well, that answer is highly subjective and depends on the investor’s nature. Active investors will prefer a human advisor for a more active approach to investing, whereas passive investors will pick robo-advisors for a more passive approach to investing. What we do know for sure is that robo-advisors are consistent and way cheaper, for which they definitely warrant a second look.