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Despite being only slightly over a decade old, robo-advisors are increasing in popularity quite rapidly around the world. Some of the best robo-advisors in Canada are among the most popular robo-advisors available.
Since investments are generally difficult to track and compare, financial advisors have dedicated their lives to mastering the art of picking stocks with success rates that don’t outperform random chance. However, with the increasing availability of wealth management platforms, such as Wealthsimple and Questwealth Portfolios, it’s easy to see why so many Canadians are ditching their financial advisors and switching to a more cost-efficient method of passive investing.
The best robo-advisors in Canada
Canada’s best robo-advisors are listed below. Since the method of investing is still relatively new, only a handful of options currently exist. Still, the options available are excellent for all levels of investing experience.
<strong>More information about Wealthsimple</strong>
$50 bonus when you open and fund your first Wealthsimple Invest account* (min. $500 initial deposit)
Various investing options and savings accounts available
2. Questwealth Portfolios
<strong>More information about Questwealth Portfolios</strong>
Get industry-leading low fees (0.20% to 0.25%)
<strong>More information about Justwealth</strong>
4. Nest Wealth
<strong>More information about Nest Wealth</strong>
5. CI Direct Investing
<strong>More information about CI Direct Investing</strong>
6. RBC InvestEase
<strong>More information about RBC InvestEase</strong>
7. BMO SmartFolio
<strong>More information about BMO SmartFolio</strong>
<strong>More information about Invisor</strong>
<strong>More information about ModernAdvisor</strong>
10. Smart Money Capital Management
<strong>More information about Smart Money Capital Management</strong>
What is a robo-advisor?
A robo-advisor manages investments on behalf of the client using an algorithm. Using a robo-advisor instead of a (human) financial advisor generally means the client pays less in management fees.
Before working with a robo-advisor, clients answer a set of questions outlining their preferences before any trading or investing happens. Preliminary questions are asked, which tend to involve their annual income, risk tolerance profile, and financial goals.
Opening and managing an account with a robo-advisor can be done online through the robo-advisor’s website or, if offered, through its mobile app.
How do robo-advisors work?
Every robo-advisor in Canada has its policies, usually differing in commission rate, trade method, and company policy. Generally, robo-advisors in Canada trade Exchange-Traded Funds (ETFs). ETFs combine various investments to create a portfolio for investors. In some ways, ETFs are similar to mutual funds, in that they combine many investments into one grouped investment.
As mentioned, robo-advisors use an algorithm to make investment decisions on behalf of the client. Depending on your risk tolerance, financial goals, and yearly income, robo-advisors make decisions based on what you want.
What do robo-advisors invest in?
Robo-advisors still need humans to some of the decisions that they eventually make. While robo-advisors in Canada do most of the heavy lifting involved with investing, as an investor, you still have most say into what your money is going into. Robo-advisor creates a diversified portfolio based on the information you provided before you opened the account.
Robo-advisors generally invest in US and Canadian bonds, short-yield and high yield bonds, real estate, commodities, futures, and other investment options.
Depending on the robo-advisor that you choose to work with, ETFs can be arranged to your liking. For example, Wealthsimple offers Halal Investing options for persons who are looking to invest in opportunities that align with their personal beliefs.
Are robo-advisors safe?
Risk-tolerance places a significant role in how safe your investments are when working with a robo-advisor. Risk-tolerance is how comfortable the investor is with risking their investments and stocks, which can be susceptible to sharp swings, depending on the agreement with the robo-advisor. If you choose in low-risk investments, robo-advisors can be a safe means of parking your money over several years. Before opening an account with a robo-advisor, investors will typically disclose what their risk tolerance risk is regarding their finances.
The Golden Rule of investing is “High risk; high return.” That said, the often unspoken second half of that rule is “High risk; harsh loss.” Since a robo-advisor is doing the investing on your behalf, the same rules apply. The volatility of robo-investors is on par with that of stocks; the risk level depends on the investor.
Things to consider when choosing a robo-advisor
As with all investments, your choice of providers comes down to personal preference. If you’re wondering how to choose the best robo-advisor in Canada, consider these five aspects.
Risk tolerance, also known as risk appetite, is how much an investor is willing to risk. Understanding what your personal tolerance to risk plays a pivotal role when using a robo-advisor and investing as a whole for that matter. Recognizing that you’ll likely see your investments rise and fall, it’s important to comfortably assess how much risk you’re willing to take. Your risk profile is a key factor that determines where you’re investing.
Investments: Since robo-advisors in Canada primarily deal with ETFs, some people want to know where their investments are going. Most robo-advisors will tell you what you are investing in, so you can choose where your money goes and what you are investing in.
Minimum investment requirements, fees, and promotional offers: Many robo-advisors—but not all—require a minimum investment before opening an account. Generally, the minimum investment begins at $1,000, though this might not entirely be the case.
Though robo-advisors come with fewer fees and commissions to that of regular financial advisors, its influential to consider expenses, as they can add up over the years – and sometimes decades – of service use. If you’re considering leaping robo-advisors, it’s always more beneficial to get more bang out of your buck with promotional offers.
How to choose the right account for your investments
Regardless of what robo-advisor you end up picking, you’ll have to decide on what type of account you’ll want to keep your investments in.
This is also the case if you find yourself using an online brokerage. Generally, most robo-advisors will offer a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). If you haven’t maxed your contribution limit for each account, you can earn tax-free gains, dividends, and interest using these accounts.
However, if you have maxed your contribution limits in both tax-free accounts, you’ll have to place your investments in a non-registered account.
Tax-Free Savings Accounts (TFSAs) offer Canadians the option to place several investments and savings into a tax-free account. TFSAs are incredibly flexible, allowing free withdrawals and deposits with no tax penalties. You can increase your wealth by earning tax-exempt interest. Since TFSAs are registered accounts, they come with contribution limits and are registered with the Government of Canada. TFSAs can also hold Guaranteed Investment Certificates (GICs), bonds, stocks, and more.
Registered-Retirement Savings Plan (RRSPs) aren’t as flexible as TFSAs, but still offer some great benefits for investors. RRSPs can reduce the amount of tax that you pay each year on your income. Withdrawals are taxed, however. In fact, withdrawals are taxed at the same rate as your employment earnings are and upon withdrawal. These accounts can hold lots of types of investments, including ETFs, GICs, stocks, bonds, and more.
Non-Registered Accounts do not come with a contribution limit and are reasonably flexible when it comes to making withdrawals and contributions.
Non-registered accounts are not registered with the government. This means the accounts are taxable. However, different non-registered acounts come with different benefits. Dividend accounts come with a dividend tax credit, while capital gains in non-registered accounts are taxed at a rate of 50%.