There are so many options for investing in Canada. Do you go with a robo-advisor and let someone manage your investments or do you get an online brokerage and do it yourself? The choice is up to you.
In this article, we’ll compare Questrade vs. Wealthsimple, and see which option is better for investing in Canada.
Different Ways to Invest: Passive Investing vs. Self-Directed Investing
A robo-advisor uses software and computer algorithms to build your investment portfolio using exchange-traded funds (ETFs). ETFs either hold stocks, bonds, or a combination of both. Robo-advisors will automatically rebalance your portfolio, and some offer tax-loss harvesting.
With an online brokerage, you have several investment options. You can buy stocks, bonds, ETFs, mutual funds, and GICs. This gives you more flexibility and options than what a robo-advisor offers.
Robo-advisors do all the work for you, which can be both good and bad. It’s good because you don’t have to do the rebalancing every quarter, which can be a hassle for some people. The other good thing is it chooses your asset allocation based on the risk tolerance questionnaire you filled out when you signed up.
However, the cost of using a robo-advisor can be quite expensive compared to doing it yourself. Also, how a robo-advisor invests might end up not being how you want to invest. For instance, if you want to invest in socially responsible funds, not all robo-advisors have that option. The other downside is the cost. While fees for using a robo-advisor are lower than most actively managed funds, the annual management fee is often around 0.5% to 0.7% of your total portfolio on top of the management fees of about 0.2% for the ETFs it buys.
Going the self-directed route is what some investors choose if they want more control. You can also select low-cost investments such as ETFs or index mutual funds. The annual management fees on these can be less than 0.1%, making it much less expensive than using a robo-advisor. There are also all-in-one ETFs that invest in a mix of stocks and bonds, and do the rebalancing for you. They cost a bit more at around 0.2%, but you don’t have to do any work.
Using an online brokerage has its downsides. If you’re building a portfolio of stocks, it can be time-consuming because you should research each and every stock before buying. You also have to monitor your portfolio to make sure your investments are performing as well as you expected. You usually need a lot of money ($50,000 or more) in order to build a diversified portfolio of stocks. It can be costly to invest regularly because you have to pay a commission for every trade you make unless your brokerage doesn’t charge you for buying stocks or ETFs. And there are some accounts where you need to maintain a minimum balance or you’ll be charged a quarterly fee.
Low-Risk vs. High-Risk Investment
Risk is fundamental when it comes to investing. The more risk you take, the greater the potential for higher returns as well as the potential for larger losses. As a new investor, you need to determine the differences between what’s low risk and what’s high risk.
Stocks are generally considered the most high-risk investment, GICs and cash are the least risky, and bonds fall somewhere in between. There are different variations of risk within each. For example, an internet stock like Amazon is a riskier investment than telecom company Rogers because it’s more volatile.
Bonds also have risks. There’s interest rate risk. If rates rise, the bond price will fall because newly issued bonds will pay a higher rate of interest. There’s also default risk. That’s when the borrower can’t pay bondholders, which means the price of the bond will fall. And there are also risks depending on the bond issuer. Government bonds are usually the safest. Corporate bonds, which are issued by companies, are riskier because there’s a possibility the company will be unable to pay its debts.
GICs and cash also have risks. The main one is inflation risk. If inflation rises at a faster rate than the income on your investment, the rate of return will actually be negative due to inflation.
Wealthsimple is one of the most popular robo-advisors in Canada (read our Wealthsimple review). It also offers socially responsible and halal investing.
The company has different perks depending on your portfolio size. For instance, if you have more than $100,000 invested, the annual management fee drops to 0.4% from 0.5%.
It also has a trading platform called Wealthsimple Trade, which offers commission-free stock and ETF trading. There isn’t a minimum investment, but there are currently only tax-free savings account (TFSA) and non-registered accounts available.
Wealthsimple is for those new to investing and want someone to take care of their portfolio for them. Wealthsimple Trade is for the person who wants to take charge of their investments and doesn’t want to pay any commissions.
Questrade charges lower commissions than most online brokerages (read our Questrade review). It also doesn’t charge a commission for ETF purchases.
The brokerage also offers Questwealth Portfolios, which is its own robo-advisor. The total annual fee is just 0.38% (a 0.25% management fee plus the fee of 0.13% for the ETFs). If you have more than $100,000 invested, the management fee drops to 0.2% for a total annual fee of 0.33%.
Which Should You Use?
Wealthsimple and Questwealth Portfolios are both great options for those who’d rather leave the investment decisions to someone else. And Questrade and Wealthsimple Trade are great for those who want to take a hands-on approach to investing. Which one you use is up to you.
- Savings vs Investment: Which Option Is Better?
- Online Investing: Robo-Advisors vs. Online Brokerages
- Choosing the Right TFSA Based on Your Risk Tolerance