Robo-advisor
A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice. They usually do not get involved in more personal aspects of wealth management, such as tax planning, retirement planning or estate planning.[1]
Typically the investor fills an online questionnaire to assess his/her risk tolerance and objectives. A phone call or live chat may also occur.[2] An exchange-traded funds (ETF) portfolio will then be recommended accordingly, out of five to ten standard choices ranging from conservative (more bonds) to aggressive (more stocks).[3] The ETF portfolio will be automatically maintained by the robo-advisor.
Some robo-advisors have a traditional passive investing approach, using broad-market ETFs with low fees and no market timing. Others have a more active approach, for example using so-called “smart beta” ETFs or variable asset allocations.[3]
While robo-advisors were initially marketed to millennials, in 2017 the average client was about 44 years old.[4]
Regulatory model
Robo-advisors operating in Canada are typically licenced as portfolio managers.[5]
There is no "online advice" exemption from the normal conditions of registration for a portfolio manager (PM). The registration and conduct requirements set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) are "technology neutral". The rules are the same if a PM operates under the traditional model of interacting with clients face-to-face and if a PM uses an online platform.[6] Often, model portfolios are created using algorithmic software although, again, a registered advising representatives (AR) has responsibility for the suitability of each client’s investments.[6]
An online questionnaire and interface facilitates much of the "know your client" process, but a live, licensed portfolio manager must review this information and the recommended portfolio to ensure suitability. This review has to be done through what the Canadian Securities Administrators (CSA) calls a "meaningful discussion" between a licensed portfolio manager and each client.[7]
Costs
As of December 2020, on the first $100k invested, yearly fees range from 0.5% to 0.7%, including the costs of the underlying ETFs, at six of the eight robos reviewed by MoneySense.[8]
For comparison, the MERs for Asset allocation ETFs -- which offer essentially the same convenience, and are purely passive -- are approximately half of this.
Pros
- Cheaper than traditional investment advisors using mutual funds for moderate-sized portfolios.
- No work for the investor, no knowledge required.
- Less risk of behavioral mistakes.
- Fees are transparent.[9]
Cons
- Significantly more expensive than buying the very same ETFs, or another model portfolio of low-cost ETFs, at a discount broker yourself and rebalancing occasionally.
- Also significantly more expensive than buying a single asset allocation ETF, which requires no rebalancing
- There may be significant changes in asset allocation over time within the portfolios: in one example, US stocks went from 15% to 32.5% over a 2.5 year period, without the investor having any control over it[10]
- Portfolio recommendations may not take into account factors such as job type or stability, workplace pensions, etc.[2][11]
- If the robo-advisor uses an active approach, results may be better or worse than a passive approach: the active strategies add uncertainty.
- Some of the ETFs used by robo-advisors have high fees and/or have a short track record.
- Some robo-advisors are now promoting active stock trading and trading in highly volatile cryptocurrencies, which go completely against the original "good-for-you" philosophy[12]
Alternatives
- An investor willing to pay 1% per year for a hands-off diversified portfolio should also consider one fund porfolios, including relatively low-cost balanced funds.
Doing it yourself
The steps performed by the robo-advisor in exchange of what are still high fees are not rocket science, and are not as complex or time-consuming as you may think. Investors in search of much lower annual costs, and who can stay the course, will therefore opt for the DIY route, with index funds, a small number of ETFs (simple index portfolios) or asset allocation ETFs.
- Risk tolerance questionnaires are available freely online.
- Model portfolios can be found in simple index portfolios or at Canadian Couch Potato.
- For frequent purchases, including automated regular contributions, index funds are the easiest route and do not require a brokerage account. The example presented in four index funds has a weighted average cost of 0.44% as of December 2016.
- For larger portfolios and infrequent purchases, ETFs have lower costs: the example of three ETFs has an average MER of 0.15%, to which trading commissions must be added.
- If you have selected your asset allocation but are intimidated by the vast array of ETFs available, see the very low-cost broad market cap-weighted ETFs listed in the following pages: Canadian bonds, Canadian equities, US equities and International equities.
- If you have never used a discount brokerage account, see the helpful videos listed at How to build an ETF portfolio at...
- If you are concerned about the details of rebalancing, see the detailed examples in Strategies for rebalancing.
- If the world stock markets are down quite a bit and you are panicking, before you sell everything, get moral support for free from the Financial Wisdom Forum!
See also
References
- ^ Robo-Advisor, Investopedia, viewed December 3, 2016
- ^ a b David Israelson, The robo-adviser choices grow in Canada, The Globe and Mail, June 18, 2016, viewed December 3, 2016
- ^ a b David Aston, Find out if you should go robo, MoneySense, May 18, 2016 (subscription required)
- ^ O'Hara C (2017) Robo-advisers find popularity where few thought they would. The Globe and Mail, viewed June 3, 2019.
- ^ Rob Carrick, The Globe and Mail, Rob Carrick's 2018 robo-adviser guide: find the right firm for you, November 16, 2018, viewed June 3, 2019
- ^ a b "CSA Staff Notice 31-342 Guidance for Portfolio Managers Regarding Online Advice" (PDF). Canadian Securities Administrators. September 24, 2015. Retrieved December 17, 2016.
- ^ Dan Hallett (September 2016). "Scalability is a huge issue for robo-advisors". Investment Executive. Retrieved December 17, 2016.
- ^ MoneySense, A guide to the best robo-advisors in Canada for 2021, December 31, 2020, viewed October 7, 2021.
- ^ Paul Brent, What to consider when deciding whether to use robo-advisers, The Globe and Mail, June 17, 2016
- ^ Aman Raina, Aman Raina’s mid-year ROBO advisor review, Financial Independence Hub, November 18, 2019
- ^ Guy Dixon, Automation takes the emotion out of the investing equation, The Globe and Mail, June 17, 2016
- ^ The Globe and Mail, Why Wealthsimple went from preaching low-fee, low-risk investing to pushing stock trading and crypto, October 6. 2021, viewed October 7, 2021.
Further reading
- Financial Wisdom Forum topic: "Robo-advisors"
- Financial Wisdom Forum topic: "Robot Wealth Managers"
External links
An actual experience with a Canadian robo-advisor, from Aman Raina at the Financial Independence Hub:
- Robo Advisors, A Personal Experience Part 1: Getting Started, February 23, 2015,
- Putting a Robo-Adviser to the Test, Part 2 (a), March 17, 2015.
- Putting a ROBO adviser to the test, Part 2 (b), March 18, 2015.
- Aman Raina’s Robo portfolio — 2 years later, February 24, 2017
- Aman Raina’s 3-year review of his Robo Advisor portfolio, March 2, 2018: "In the three years I’ve had the portfolio, my ROBO has made changes in the asset allocation three times and has turned over 75% of the portfolio. So if you expect a “set-it and forge it” strategy, you won’t find it here"
- Aman Raina’s 4-year Robo Advisor review, March 7, 2019: "The US portion now has 2 ETFs that invest in the same basket of US stocks, which I continue to look at in bewilderment."
- Aman Raina’s mid-year ROBO advisor review, November 18, 2019: "This marks the 3rd significant change in my portfolio’s asset allocation in the 4 1/2 years I’ve had the portfolio. I think we can clearly say this portfolio has not been passively managed."
- Aman Raina’s 5-year Robo advisor review, March 27, 2020
Robo reviews
- Michael McCullough (February 8, 2024). "Best robo-advisors in Canada for 2024". MoneySense.
- Rob Carrick (November 15, 2022). "The Globe and Mail's 2022 Robo-Adviser Guide". The Globe and Mail.
- Rob Carrick (November 19, 2020). "Robo-advisers laid bare – how they compare on fees, returns and investing approach". The Globe and Mail.