Online Investing: Robo-Advisors vs. Online Brokerages

Craig Sebastiano
by Craig Sebastiano July 30, 2019 / No Comments

If you’re new to online investing, you have the option of doing it yourself by using one of the many robo-advisors or online brokerages in Canada. When you put your investments in a registered account—such as an RRSP or tax-free savings account (TFSA)—it’s less complicated because you won’t have to worry about calculating taxable income.

Robo-advisors chooses your investments for you. With an online brokerage, you make all the investment choices.

As a self-directed investor, you can invest actively, passively, or both. If you’re an active investor, you’ll choose individual stocks or bonds and buy and sell them whenever you decide is best. You should research your investments before making any decisions on whether to buy or sell. As a passive investor, you’ll buy either index funds, exchange-traded funds (ETFs), or use a robo-advisor. There isn’t as much research involved. And with the recent launch of all-in-one ETFs—indexed ETFs that invest in a mixture of stocks and bonds that automatically rebalance themselves—there’s even less research you need to do.

There are two types of accounts you can hold your investments in: registered and non-registered accounts.

A registered account—such as an RRSP, TFSA, or RESP—allows your money to grow without it being taxed. You only pay tax when you make a withdrawal from your RRSP, but not a TFSA. With an RESP, only the government grants and investment income earned are taxed, not the contributions. Since your child is likely making the withdrawals as a student and probably has little to no income, it’s unlikely he or she will pay very much tax.

The Benefits of Online Investing

Online investing is easy and convenient. In the past, most people would walk into their bank and meet with a financial advisor. That advisor would (and still does) recommend the bank’s own investment products. The bank’s GICs, for example, will usually have a lower interest rate than what smaller competitors offer. And the bank’s advisor will often recommend a mutual fund that charges a high annual fee (sometimes around 2%).

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Using a discount brokerage allows you to choose your own investments. You can buy mutual funds—such as index funds that charge an annual fee of 1% or less—or GICs that offer a better interest rate. Online trading is also a lot less expensive than calling a broker. For instance, many online brokerages charge about $10 or less for each online trade. If you want to trade over the phone, the cost is usually more than $30 a trade when you call an online brokerage.

Being able to do things for yourself doesn’t completely eliminate the need for a financial advisor or broker. But most young investors just starting out probably don’t need an advisor since they don’t have a lot of assets or have complicated tax situations. There are fee-only financial advisors, many of whom offer unbiased advice and aren’t licensed to sell investment products. These advisors will often help you with tax, investment, retirement, and estate planning.

When you invest, it’s best to put your money into a TFSA or RRSP to minimize the amount of tax you pay. It also makes filing your taxes a lot easier.

What is a Robo-Advisor?

A robo-advisor collects information from you about your risk tolerance levels, your goals, and your income. Once it has that information, it invests in a variety of ETFs. It also rebalances your portfolio on a regular basis.

Robo-advisors use a passive investment strategy. The ETFs they buy track an index, such as the S&P/TSX Composite Index or the S&P 500. The goal of the ETF is to match the index’s return, not beat it.

There are many benefits of robo-advisors.

  • First, you don’t have to buy an overpriced mutual fund. Instead, the robo-advisor buys a basket of low-cost ETFs.
  • Second, it rebalances your portfolio.
  • Third, contributions can be made on a regular basis and there’s no additional cost.

With a robo-advisor you pay the annual cost of the ETFs—which is usually around 0.2%–plus an annual management fee of about 0.5%. In total, the average cost is often around 0.7%. Many studies have shown that mutual fund costs eat into an investor’s overall return, especially those that are charging 2% annually.

One of the largest robo-advisors in Canada is Wealthsimple*. The company also offers a high-interest savings account called Wealthsimple Save, which currently has an interest rate of 2%. There’s also an online brokerage called Wealthsimple Trade, which offers commission-free trading. However, it only offers non-registered online brokerage accounts at this time.

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What is an Online Brokerage?

An online brokerage is a place where you buy stocks through the internet instead of over the phone or in an actual broker’s office. As a self-directed investor, you call the shots and can invest either actively or passively. Active investors try to beat an index’s return, not match it.

You get to decide how much risk you want to take by online investing as aggressively or conservatively as you want to. With an online brokerage, you can invest in individual stocks and bonds, as well as GICs and ETFs. And it’s up to you to rebalance your portfolio regularly.

The recent launch of all-in-one passive ETFs has made rebalancing even easier. Instead of having to buy a bunch of bond and stock ETFs, you can now buy one ETF that’s rebalanced on a regular basis. And the annual fee for these are around 0.2% to 0.25%, making them up to two-thirds less costly than a robo-advisor.

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