A Guide to Robo-advisors
You might be forgiven—with all the talk of smart machines taking Canadian jobs —if you thought of robo-advisors as another bid at making the Terminator’s world a reality on Bay Street.
In fact, the appearance of robo-advisors is an effort to turn a basic investing fundamental—re-balancing your portfolio—from something mystical into a move that is done automatically and cheaply.
Essentially, robo-advisors relieve individuals from paying a premium for a simple manoeuvre and instead make their broker work harder for their investment dollar.
Until recently, you needed to get your advisor to switch around your investments to keep the portfolio within your target risk-reward range.
Robo-advisors—with their almost automatic ability to change your investment mix—eliminates the need for pricey investment pros to rebalance your portfolio. That means you pay less to keep your investments in the proper order and those advisors can spend their time doing something to really justify their fees.
What’s a Robo-advisor?
A robo-advisor builds a portfolio based upon your risk tolerance, financial goals and personal situation. This financial grouping usually includes equities across a variety of industrial sectors and a mix between stocks and bonds.
Periodically, your portfolio might get aligned differently than the desired balance. Maybe one sector performs better than another making that group more valuable in your specific mix. Whatever the reason, the robo-advisor will shift your holdings so that the portfolio maintains its initial metrics.
Here’s the trick: The financial watcher doesn’t buy or sell individual equities to achieve this goal. Instead, they trade exchange-traded funds (ETFs), investment vehicles that hold a variety of stocks that mimic a particular index or sector.
So, the rebalancing process isn’t stock picking but an almost mathematical function of buying or selling ETFs, a far simpler process.
So, There Aren’t Any Robots Involved?
No. You talk to human beings.
The ‘robo’ part of the term refers to the automatic process of adding or subtracting ETFs to maintain the original shape of the portfolio. Some robo firms do offer more sophisticated financial advice for individuals at an additional price.
But Don’t I Want the Advisor Involved?
Not for this particular function.
You don’t rebalance a portfolio to maximize a rate of return, at least in the short term. Instead you switch around investments to keep the risk-return equilibrium of the stocks and bonds within the bounds of what you wanted when you originally set up the portfolio.
Besides, there is an amount of academic literature that says financial advisors aren’t any better picking individual stocks than any one else. So—this line of reasoning goes—you’re better off holding a fistful of ETFs that mirror industries than you are having a financial pro picking single stocks that just lose money.
Why Am I Doing This?
To save time and money.
You save time because figuring out which individual stocks to purchase—whether on your own or spending time listening to your advisor tell you the rationale underlining each stock move—can be a lengthy process.
Also, by focusing on individual stocks, you can spend an inordinate amount of time stressing about single-day price moves.
While holding ETFs does take away the gambling aspect to stocks, the process gets rid of most of the anxiety associated with equity markets. You save money because robo-advisor accounts usually have fees than are less than what traditional brokers or financial planners charge.
The automated nature of robo-investing means you don’t have some high-priced suit fidgeting with a hand calculator looking for the correct mix of stocks. Instead, they just reassess your ETF mix and act accordingly, which is a less costly process.
In most cases, those savings gets passed along to the client in terms of lower fees.
How Much Money?
The fees associated with the robo accounts consist of three factors:
- Advice fees—You’re looking at somewhere in the range of 0.5% for minimum dollar accounts and a smaller percentage for people with more money.
- Fund fees—This is the money you fork over when you buy the ETFs. But you don’t pay these directly; instead these fees are subtracted from the ETF returns.
- Trading commissions—These are generally covered in the advice category.
Some services work on the basis of a monthly subscription fee, say $10 to $40, versus a percentage of the amount invested. Overall, a typical robo-advisor will cost an individual between 0.5% and 0.8% of the monies invested every year.
Who Should Use Robo-advisors?
To some extent, people in any financial circumstance would gain from robo-investing. But the vehicle is really ideal for younger investors—basically millennials.
For one thing, this cohort is tech savvy and appears more accepting of online investing than older individuals. As well, younger people are usually just starting out in their careers and don’t have a ton of cash to sink into the stock market.
So, they don’t need a lot of hand holding from financial planners; these investors just need someone to look over their portfolio to make sure it still fits their risk-reward tolerance.
Older people, perhaps empty nesters approaching retirement, might be more willing to look at owning individual stock and bond issues. Here, planners would have to be more involved in the investor’s portfolio.
Are My Assets Safe?
In the event the robo-advisor goes bankrupt, the assets you hold are as safe as they would be if you invest with one of the big banks or other large financial institution.
That’s because most robo-advisors are basically storefronts whereby the investment part is run by some third party. And it is those back office entities that complete the trades.
Usually the third party group is a member of the Canadian Investor Protection Fund (CIPF), which provides investor help in the case of member bankruptcy. That said, you should check to make sure the advisor you’re considering is a CIPF member or has a back office partner that is a member.
Can't I Just Buy ETFs Instead?
You could and save the higher commissions you would pay in a robo-advisor versus an ETF-only vehicle. In that scenario, however, you’d still face the problem of making sure your mix of ETFs reflected your risk-reward trade-off.
That process could be time consuming. And the whole point of buying into the robo funds was to save yourself the time and effort rebalancing your portfolio.
The cost of a robo-advisor depends upon which firm you go with and what services you use. Here’s a comparison of some of Canada’s more prominent robo-advisors:
|Name||Availability||Minimum Account Size||Account Options||Annual advice/management fees||Annual ETF fees||Trading fees|
|BMO Smartfolio||Across Canada||$1,000||RESP, RRIF, RRSP, TFSA, non-registered||First $100,000: 0.7%; next $150,000: 0.6%; next $250,000: 0.5%; remainder above $500,000: 0.4%; $15 minimum quarterly fee (waived if you deposit $250 or more||0.2% to 0.35%||Included in advice fee|
|Invisor||Alta., B.C., Man., Ont., Sask.||None||LIRA, RESP, RRIF, RRSP, TFSA, non-registered||First $250,000: 0.5%; next $250,000: 0.4%; remainder above $500,000: 0.3%||0.2%||Included in advice fee|
|Justwealth||Alta., B.C., Man., N.L., N.B., N.S., Ont., Que., P.E.I., Sask.||$5,000 (except for RESPs)||LIRA, RESP, RRIF, RRSP, TFSA, non-registered||Under $500,000: 0.5%; more than $500,000: 0.4%; all accounts (except RESPs) subject to minimum fee of $10/month when household investments are below $25,000; RESP accounts subject to minimum fee of $2.50/month when household investments are below $25,000||0.21%||Included in advice fee|
|ModernAdvisor||Alta., B.C., Man., N.L., N.B., N.W.T., N.S., Ont., Que., P.E.I., Sask.||None||LIRA, RESP, RRIF, RRSP, TFSA, non-registered||$0 to $10,000: free; $10,000 to $100,000: 0.5%; $100,000 to $500,000: 0.4%; $500,000 or more: 0.35%||0.25%||Included in advice fee|
|Nest Wealth||Alta., B.C., Man., N.L., N.B., N.S., Ont., Que., P.E.I., Sask.||None||RESP, RRIF, RRSP, TFSA, non-registered||Under $75,000: $20/month; $75,000 to $150,000: $40/month; $150,000 or more: $80/month||About 0.13%||$9.99 per trade to rebalance your account up to a maximum of $100/year|
|PortfolioIQ||Across Canada||$1,000||LIRA, RESP, RRIF, RRSP, TFSA, non-registered||$1,000 to $99,999: 0.7%; $100,000 to $249,999: 0.6%; $250,000 to $499.999: 0.5%; $500,000 to $999,999: 0.4%; $1 million or more: 0.35%||0.21% to 1.25%||Included in advice fee|
|Responsive Capital Management||Alta., B.C., Ont.||TFSA and non-registered accounts: $10,000; RRSP: $15,000||RRSP, TFSA, non-registered||$0 to $200,000: 0.8%; $200,000 or more: 0.5%||0.14% to 0.19%||Included in advice fee|
|RoboAdvisors+||Alta., B.C., Man., Ont., Que.||$25,000||RESP, RRIF, RRSP, TFSA, non-registered||0.25%||0.54% to 1.14%||Included in advice fee|
|Smart Money Capital Management||Alta., Ont., Que.||$5,000||LIRA, RESP, RRIF, RRSP, TFSA, non-registered||0.8%||0.25%||Included in advice fee|
|WealthBar||Alta., B.C., Man., N.L., N.B., N.S., Ont., Que., P.E.I., Sask.||$1,000||RESP, RRIF, RRSP, TFSA, non-registered||First $5,000: free; next $145,000: 0.6%; next $350,000: 0.4%; remainder above $500,000: 0.35%||0.26% to 0.34%||Included in advice fee|
|Wealthsimple||Across Canada||None||LIRA, RESP, RRIF, RRSP, TFSA, non-registered||Under $100,000: 0.5%; $100,000 or more: 0.4%||About 0.2%||Included in advice fee|