What Are Robo-Investors and How Can They Help You Invest?
Domo arigato, Mr. Roboto
Mata au hi made
Domo arigato, Mr. Roboto
Himitsu wo shiri tai
If you’ve never heard the song Mr. Roboto by Styx, and you don’t know Japanese, let me translate for you.
Thank you very much, Mr. Robot
Until the day we meet again
Thank you very much, Mr. Robot
I want to know your secret
Who would have known that a #1 hit from 1983 would go on to foretell how the financial services industry has changed in Canada. There’s really no secret: robo-advisors have arrived in Canada and they’re ready to meet us.
Wealthsimple, Nest Wealth, and WealthBar have already established themselves in Canada, while new players continue to come online ready to join the robot wars. But what exactly are robo-advisors?
Robo-advisors are online-based wealth managers. Dave Nugent, Chief Investment Officer at Wealthsimple, describes their style as “emotionless investing, driven by technology that aims to make managing your money low-cost, transparent, and simple.”
The term “robo-advisors” is what throws people off the most. Despite the name robo-advisors, there will always be a real human available to chat with online or over the phone. This makes things incredibly easy since we can schedule our meetings whenever it’s convenient for us. There’s no need to go to an office to set up accounts or talk to our advisor; we can do it all from the comfort of our home or wherever suits us the best.
The way we bank and invest is due up for a modernization, but some of us aren’t even comfortable with online banking and contactless payments yet. Are robo-advisors safe and reliable?
Answer: They sure are. The industry (including the people they employ) are regulated just like the banks and other major firms. The Canadian Investor Protection Fund insures each one of your accounts up to $1,000,000 to protect you against fraud or bankruptcy. Wealthsimple even offers an additional $10 million in insurance.
I’m not a robot without emotions. I’m not what you see
I’ve come to help you with your problems, so we can be free
In the past, new investors had a hard time getting quality advice at a reasonable price. To simplify things, most people would work with a financial advisor that recommended mutual funds. At the retail level, this kind of financial planning is questionable and the fees paid can add up. Robo-advisors address this problem with their lower fees.
There’s no trick here; robo-advisors select industry-leading ETFs when building portfolios. The fees we pay are based on portfolio size—the larger our accounts, the less we pay. We’ll also have to pay the management expense ratio (MER) associated with our ETFs, but the costs are still significantly lower. The average MER of a mutual fund is 2.5%, whereas working with a robo-advisor will easily cost you less than 1% in fees. That difference could be a few hundred thousand dollars by the time we retire.
Portfolios are designed on an individual basis and are based on a standard risk assessment questionnaire. With those answers, robo-advisors determine our asset allocation and choose investments that suit our investing style. Rebalancing is done automatically when certain thresholds are met; there’s zero emotions attached which helps keep costs low.
I’m not a hero, I’m not the saviour, forget what you know
I’m just a man whose circumstances went beyond his control
How robo-advisors operate is definitely appealing to many investors, but we shouldn’t expect them to change the way we invest our money overnight. What they have done is present us with more options and services.
“Initially, robo-advisors were strictly offering to manage money using low-cost ETFs” says Nugent. “Now we’re seeing them help investors achieve their goals whether short- or long-term with financial planning.”
Despite the modern conveniences, robo-advisors aren’t for everyone. Many of us still prefer to manage our own investments, and high net-worth individuals or people with complicated investments might be better off working with a fee-only financial planner.
Even if we choose not to work with a robo-advisor, there’s no denying that their entry into the Canadian market is a win-win situation for investors.
Thank you very much, Mr. Roboto
For doing the jobs nobody wants to
And thank you very much, Mr. Roboto
For helping me escape to where I needed to
Thank you, thank you, thank you
I want to thank you, please, thank you, oh yeah
Flickr: Peyri Herrera