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Illustration by Melanie Lambrick
You may have heard of robo-advisers, the automated digital tools that help you manage your investments without actually managing them, at low cost. But what are robo advisers really, how do they work and how do you know if they are the right choice for your finances? Here we answer some frequently asked questions.
What is a robo advisor? How do you work?
A robo-advisor is basically a software program that automatically invests your money and balances your portfolio based on your investment profile.
That’s how it usually works. You go online, open an account with a robo-advisor of your choice, and answer a series of questions about who you are and what you want: things like your age, your risk tolerance, how long it will be before you need the money back, and if You are looking for additional factors such as socially responsible or halal investments. The robot (it’s not really a robot) will recommend a portfolio to you. Then you add funds to your account, either in a lump sum or by setting up automatic withdrawals from your bank account.
After that, based on your profile, the software creates a portfolio of investments and buys them with your initial funds. Over time, it will continue to allocate your money to investments and balance your portfolio so that it continues to match your profile.
How this actually works depends on the robo-adviser. The steps may be slightly different and each works with a different set of investments. But the most important points to remember are that the system is designed so simply that you don’t have to worry about managing your investments and it is automated so that no human needs to actively intervene.
What do robo advisers invest in?
Robo-advisors generally invest in low-cost index-tracking exchange-traded funds, or ETFs. You select a selection of these ETFs for your portfolio based on your personal investment profile and keep the portfolio balanced as you make deposits and as the value of the investments change.
The specific ETFs they buy depend on the robo-adviser, as does whether they include non-ETF investments. For example, BMO SmartFolio offers five different portfolio options, all of which contain a mix of equity and fixed income ETFs. CI Direct Investing’s portfolio ranges from conservative to aggressive; In addition to stock and bond ETFs, CI Direct also offers real estate, home mortgages or other assets through private pool funds.
Can you manage an ETF with a robo-adviser?
Robo-advisers buy ETFs on your behalf and manage your portfolio. But they buy from their own selection of ETF options – you can’t select specific ETFs within your account.
If you want to buy a specific ETF, you can look for a robo-adviser to include it in their offering. Alternatively, you can skip the robo-advisors and opt for a self-directed investment strategy instead.
What are the advantages of a robo adviser?
“Robo-advisers are an ideal investment solution for people willing to pay a modest fee to have a portfolio of low-cost exchange-traded funds assembled to their needs and then managed on an ongoing basis,” says Rob Carrick, The Globe and Mail’s personal finance columnist.
The benefits come from two main things: comfort and economy.
The convenience comes from the fact that a robo-advisor is a set-it-and-forget-it system. Put a little effort into creating your profile, arrange for regular automatic withdrawals from your bank account, and you won’t have to worry about your investments at all. There is also no need to make an appointment or meet up with anyone to get started. Registration is electronic, no paper required. Also, you don’t need a lot of money to open an account. Some robo-advisers have no minimum account size at all, although they may not actually invest the money until it reaches a certain threshold, e.g. B. $1,000.
The other main advantage is that robo-advisors are usually inexpensive — which makes sense since you’re working with software and not a person on a salary.
How much does a robo adviser cost?
With a robo adviser, you usually pay twice. A fee — a portfolio management fee — goes straight to them. It is calculated as a percentage of your account balance. As with any ETF investor, you also pay fees associated with these funds, which are deducted from returns by the ETF companies (the net returns are reported to investors). While fees for buying and selling are generally included in the portfolio management fee, this isn’t always the case, so check this when comparing options.
How much does all this add up to? It depends who you buy from. In November 2021, Mr. Carrick reviewed various robo-advisors on a variety of factors, including cost. He found that the all-in fees for most options ranged from 0.33 percent to 1.05 percent.
Can a robo-adviser give personal financial advice?
Depends on what you mean by personal. Robo-advisors don’t buy the same investments for everyone – they match each investment profile to one of their existing portfolios. But an investment profile is just that—a profile. It will not be tailored to your specific individual situation.
If you want personal advice or just want to speak to a human, most robo-advisors have a support system that you can fall back on. However, if your personal financial situation is complicated, they may not be able to offer advice. In this case, hiring a financial planner might be a good idea.
Robo-Adviser vs Financial Planner: Which is Better?
Both are not necessarily better – It’s just a question of what’s better for you right now.
The benefit of paying fewer fees can be huge. Lower fees mean more money in your portfolio, and the difference can really add up over time.
But that doesn’t mean fees are inherently a bad thing. It’s a question of whether you get any value out of it.
“Our clients rely on us for so many things — not just investing — that I can’t imagine a robo-advisor giving them what they need,” said Mary Ellen Byrne, vice president, portfolio manager and investment advisor at TD Vermögensberatung for private investments in Halifax. “Everything is connected. They want to know when to take CPP and OAS and if they will be reclaimed. It’s not just about stock picking.”
Most robos build cookie-cutter portfolios from a selection of exchange-traded funds designed to provide broad exposure to the stock and bond markets, writes Tamar Satov in Report on Business Magazine. Investment advisors, on the other hand, can choose from an open range of investment products on behalf of their clients, which can offer better diversification.
Robo-Adviser vs. Self-Directed Investing: Which is Better?
The difference here is both convenience and confidence. Using a robo-advisor means you don’t have to deal with the heart of buying and selling funds, which is a time saver. It also makes the purchasing decisions for you, which is a good choice if you’re not sure you have the knowledge to make such decisions and aren’t interested in learning anything.
Essentially, you pay fees to a robo-advisor for a range of services: setting up a portfolio that suits your needs, investing money pro rata in all your funds as you contribute to your account, reinvesting dividends, and regularly rebalancing – buying and Selling ETFs to bring you back to your target asset mix. You can also talk to people from robo firms to discuss your portfolio.
If you like doing all of these things on your own, then self-directed investing could be a good choice for you.
Which are the best robo-advisers in Canada?
There are many options for Canadians looking to invest their money in a robo-advisor, whether you prefer to work with a traditional financial institution or invest with an online brokerage or investment management service.
What to choose, the best robo advisor in Canada is the best for your needs. So how do you choose? Past performance might be a factor, but Mr. Carrick says it’s just one thing to look at. “Never choose a robo based solely on past returns,” he recommends. “Also focus on fees and portfolio construction style.”
Another thing to look at is the account size. While some robo-advisors don’t have a minimum account size (although, as mentioned above, they might not actually invest your money until it reaches a certain point), others require a minimum investment of $1,000. Keep in mind that fees also vary by account size – keep this in mind when estimating how much a robo will cost you.
Rob Carrick’s Robo Adviser Guide
Are you ready to face the differences? Mr. Carrick’s report on 10 different robo-advisers in Canada compares them based on performance, fees, holdings, provinces served and more. Use the
